HNWI Population and WealthContract Significantly 22008 in Review: Financial MarketCrisis Culminates in GlobalEconomic Downturn 7HNWIs Sought Refuge in Cash,Fixed Income and DomesticInvestments in 2008 13World’s HNWIs Scale Back on TheirInvestments of Passion AmidEconomic Uncertainty and Rising Costs 17Spotlight: Optimizing Client-Advisor-Firm Dynamics is Key as WealthManagement Firms Tackle Crisis Fallout 20Wealth Management Firms Face a New Industry Reality as Crisis Tests Client Confidence and Long-Standing Business Models 20Client Retention and Attrition Are Complex Dynamics 22Enabling Advisors Is Key to Delivering on Business Goals 25Firms Can Act to Rebuild ShakenInvestor Confidence Through MoreHolistic Risk Management 27The Way Forward 30Appendix A: Methodology 34Appendix B:Select Country Breakdown 35
World Wealth ReportTO OUR READERS,Capgemini and Merrill Lynch Global Wealth Management are pleased to present the 2009World Wealth Report. Our annual report, now in its 13th year, was initiated as our two firms began collaborating toanalyze the macroeconomic factors that drive wealth creation, and better understand the key trends that affect HighNet Worth Individuals (HNWIs) around the globe.2008 ushered in an unprecedented global downturn that originated in 2007. What started as a financial crisis soonexpanded into the larger economy, affecting mature and emerging markets alike. World equity markets lost a decadeof gains, and volatility reached record levels. Our 2008 findings show HNWIs began to lose trust in the markets, regulators,and, in some cases, their financial advisory firms. They also extended their allocations to safer investments—a trend thathad its inception a year earlier. As a result, our research shows, cash and fixed-income instruments now make up 50% ofHNWIs’ portfolios overall, and many HNWIs have retreated to familiar domestic markets.Restoring trust and confidence in the markets and the industry are resounding themes as we move forward. OurSpotlight identifies the trends and forces driving HNWI client behavior and focuses on specific opportunities that wealthmanagement firms and Advisors can pursue directly to help craft mutually value-creating relationships moving forwardinto the future.We are pleased to present this year’s Report, and hope you find continued value in its insights.Dan Sontag Bertrand LavayssièrePresident Managing DirectorGlobal Wealth Management Global Financial ServicesMerrill Lynch & Co., Inc. Capgemini
2 World Wealth Report 2009 State of the World’s Wealth HNWI POPULATION AND WEALTH CONTRACT SIGNIFICANTLY • t the end of 2008, the world’s population of high net worth individuals (HNWIs1) was down 14.9% from the year A before, while their wealth had dropped 19.5%. The unprecedented declines wiped out two robust years of growth in 2006 and 2007, reducing both the HNWI population and its wealth to below levels seen at the close of 2005. • Ultra-HNWIs2 suffered more extensive losses in financial wealth than the HNWI population as a whole. The Ultra-HNWI population fell 24.6%, as the group’s wealth dropped 23.9%, pushing many down into the ‘mid-tier millionaire’3 pool. • he global HNWI population is still concentrated, but the ranks are shifting. The U.S., Japan and Germany T together accounted for 54.0% of the world’s HNWI population in 2008, up very slightly from 53.3% in 2007. China’s HNWI population surpassed that of the U.K. to become the fourth largest in the world. Hong Kong’s HNWI population shrank the most in percentage terms (down 61.3%). • NWI wealth is forecast to start growing again as the global economy recovers. By 2013, we forecast global H HNWI financial wealth to recover to $48.5 trillion, after advancing at a sustained annual rate of 8.1%. By 2013, we expect Asia-Pacific to overtake North America as the largest region for HNWI financial wealth.HNWI Population and Wealth Shrink below 2005 LevelsAt the end of 2008, the world’s population of HNWIs was • n Europe, the HNWI population decline varied widely by Idown 14.9% from the year before (see Figure 1) to 8.6 million, country. For example, the number of HNWIs shrank 26.3%and their wealth had dropped 19.5% (see Figure 2) to $32.8 in the U.K., but just 12.6% in France and only 2.7% intrillion. The declines were unprecedented, and wiped out two Germany, which avoided a steep contraction in part becauserobust years of growth in 2006 and 2007. HNWIs there were more heavily invested in conservative asset classes than those in other countries.As a result, the world’s HNWI population and its wealth • Japan, which accounts for more than 50% of the HNWIs ended 2008 below levels seen at the close of 2005. Annual in the Asia-Pacific region, suffered a relatively mild HNWIHNWI population growth had been a robust 7.2% from decline of 9.9%, but others in the region suffered greater2005 to 2007, before reversing in 2008. The same trend was losses, including Hong Kong (-61.3%) and India (-31.6%).evident in HNWI financial wealth, which grew 10.4% per year The apparent resilience of Japan, however, stemmed largelyin 2005-07, before the steep contraction. from the fact that the expansion of the HNWI populationThe most significant declines in the HNWI population in 2008 there had already been capped by the 2007 slowdown inoccurred in the three largest regions: North America (-19.0%), macroeconomic growth and a weakening stock marketEurope (-14.4%) and Asia-Pacific (-14.2%). But behind the (market capitalization was down 11.1% in 2007).aggregate numbers lie some interesting developments in the The contraction in the overall HNWI population wasHNWI populations of those regions: exacerbated by the steeper-than-average decline (globally• he number of HNWIs in the U.S. fell 18.5% in 2008, but the U.S. T and regionally) in the number of Ultra-HNWIs. A decline in remains the single largest home to HNWIs, with its 2.5 million Ultra-HNWI numbers has a disproportionate effect on overall HNWIs accounting for 28.7% of the global HNWI population. HNWI wealth, because so much wealth is concentrated at their1 HNWIs are defined as those having investable assets of US$1 million or more, excluding 3 Mid-tier millionaires are HNWI having US$5 million to US$30 million primary residence, collectibles, consumables, and consumer durables.2 Ultra-HNWIs are defined as those having investable assets of US$30 million or more, excluding primary residence, collectibles, consumables, and consumer durables.
World Wealth Report 2009 3Figure 1. HNWI Population, 2005 – 2008 (by Region) HNWI Population, 2005 – 2008 (by Region)(In Million)CAGR 2005-2007 7.2% Annual Growth 2007-2008 -14.9% 8.8 9.5 10.1 8.6 0.1 10 0.1 0.4 0.3 0.4 0.1 0.3 0.4 0.1 0.3 0.4 8 2.8 0.4 2.6 % Change Total HNWI Population 2.4 2007-2008Number of 2.4 6 Africa -8.3% HNWIsWorldwide 3.1 Middle East -5.9% 2.9(in Million) 2.8 4 2.6 Latin America -0.7% Asia-Pacific -14.2% 2 3.2 3.3 Europe -14.4% 2.9 2.7 North America -19.0% 0 2005 2006 2007 2008Note: igh Net Worth Individuals (HNWIs) have at least US$1 million in investable assets, excluding primary H residence, collectibles, consumables, and consumer durables. Ultra-High Net Worth Individuals (Ultra-HNWIs) hold at least US$30 million in investable assets, excluding primary residence, collectibles, consumables, and consumer durables.Figure 2. HNWI Wealth Distribution, 2005 – 2008 (by Region) HNWI Wealth Distribution, 2005 – 2008 (by Region)(US$ Trillion)CAGR 2005-2007 10.4% Annual Growth 2007-2008 -19.5% US$33.4 US$37.2 US$40.7 US$32.8 1.0 1.7 40 0.9 1.4 35 0. 8 6.2 1.3 0.8 5.1 1.4 30 4.2 5.8 % Change Total HNWI Wealth, 9.5 8.4 Global 25 2007-2008 7.6 HNWI Africa -18.7% 20 7.4 Wealth (in US$ 10.1 10.7* Middle East -16.2% Trillion) 15 9.4 8.3 Latin America -6.0% 10 Asia-Pacific -22.3% 10.2 11.3 11.7 5 9.1 Europe -21.9% North America -22.8% 0 2005 2006 2007 2008*The 2007 number for Europe was restated from 10.6 to 10.710.7 as a result of updated data becoming available.*The 2007 number for Europe was restated from 10.6 to as a result of updated data becoming available.Source: Capgemini Lorenz curve analysis, 2009Source: Capgemini Lorenz curve analysis, 2009
4 World Wealth Report 2009level (each has investable assets of at least $30 million). At addition, HNWIs in Latin America tend to have relativelythe end of 2008, Ultra-HNWIs accounted for 34.7% of global conservative asset allocations, favoring fixed income.HNWI wealth, but only 0.9% of the total HNWI population. Global HNWI Population is StillThe sharp decline in the number of Ultra-HNWIs globally Concentrated, but the Ranks are(-24.6%) largely resulted from that group’s partiality for more Shiftingaggressive products, which tend to deliver greater-than-average The U.S., Japan and Germany together accounted for 54.0% ofreturns in good times, but delivered hefty losses in 2008. the world’s HNWI population in 2008, up very slightly fromThose losses helped push Ultra-HNWI wealth down 23.9% 53.3% in 2007 (see Figure 4), despite the substantial loss of wealthin 2008, and pushed a large number of Ultra-HNWIs down by HNWIs in those countries, particularly the United States.into the ‘mid-tier millionaire’ bracket. North America still For example:accounted for the largest concentration of Ultra-HNWIs(30.6k) in 2008 (see Figure 3), though that was down sharply • hina’s HNWI population surpassed that of the U.K. to Cfrom 41.2k in 2007. Regionally, Latin America retained the become the fourth largest in the world in 2008 (364k HNWIs),largest percentage of Ultra-HNWIs relative to the overall HNWI after having exceeded France in 2007. In 2008, despitepopulation (2.4%)—which is far higher than the global steep market capitalization losses, the closed nature ofaverage of 0.9%. China’s markets combined with robust macroeconomic growth to help China avoid some of the steep losses feltIn terms of overall HNWI financial wealth, the three largest elsewhere.regions suffered the heaviest losses in 2008, but Latin • Brazil surpassed Australia and Spain to reach 10th place America—the fourth largest—suffered to a lesser degree among HNWI populations globally (131k HNWIs).(-6.0%). HNWIs in Brazil, the largest country by HNWIfinancial wealth in the region, saw their wealth decline by It is also striking to note how the financial crisis impacted8.4% in 2008, far less than the global average. However, HNWIs differently in different types of economies. Forthe losses were even smaller for HNWIs in neighboring example:countries, such as Mexico and Colombia, where equity- • Hong Kong’s HNWI population took by far the largest hit in market declines were smaller, since selling was not as percentage terms, with a 61.3% drop to 37k. Hong Kong isextensive as in Brazil during the second-half of 2008. In unique in that it is a developing economy with an extremelyFigure 3. Geographic Distribution of HNWIs and Ultra-HNWIs, 2008 (by Region)Figure 3. Geographic Distribution of HNWIs and Ultra-HNWIs, 2008(by Region) 100 10 8.6 78.0 0.1 1.8 80 Ultra-HNWIs as % 0.4 8 3.5 0.4 of HNWIs, 2008 9.8 2.4 60 Africa 1.9%Number of 14.3 Number of 6 HNWIs Ultra-HNWIs Middle East 0.9%Worldwide Worldwide(in Million) 2.6 18.0 40 (in Thousand) 4 Latin America 2.4% Asia-Pacific 0.6% 2 20 2.7 30.6 Europe 0.7% North America 1.1% 0 0 2008 HNWI 2008 Ultra-HNWISource: Capgemini Lorenz Curve Analysis, 2009Source: Capgemini Lorenz curve analysis, 2009
World Wealth Report 2009 5 high market-capitalization-to-nominal-GDP ratio (5.76). HNWI Wealth is Forecast to Resume That ratio indicates Hong Kong is particularly vulnerable to Growth as Global Economy Recovers large market capitalization declines like the one experienced We forecast HNWI financial wealth will grow to $48.5 trillion in 2008 (-49.9%). By contrast, the ratio is 1.49 in Singapore, by 2013, advancing at an annualized rate of 8.1% (see Figure and just 0.83 in the U.S. Furthermore, Hong Kong has a 5). This growth will be driven by the recovery in asset prices very large proportion of its HNWIs in the $1m-$5m wealth as the global economy and financial system right themselves. band, and many of these HNWIs dropped below the $1m Also, the 2008 flight-to-safety imperative is expected to ease, threshold in 2008 due to market losses. encouraging HNWIs to return to higher-risk/higher-return• India’s HNWI population shrank 31.6% to 84k, the second assets, and away from capital-preservation instruments, as largest decline in the world, after posting the fastest rate of conditions improve. growth (up 22.7%) in 2007. India, still an emerging economy, We expect North America and Asia-Pacific to lead the growth suffered declining global demand for its goods and services in HNWI financial wealth, and predict Asia-Pacific will actually and a hefty drop in market capitalization (64.1%) in 2008. surpass North America by 2013. Growth in these regions will be• ussia’s HNWI population declined 28.5% to 97k, the R driven by increased U.S. consumer expenditure as well as new- seventh largest per-country drop in 2008, after growing at found autonomy for the Chinese economy, which is already the tenth fastest rate (14.4%) in 2007. Russia’s economy experiencing increased consumer demand. decelerated rapidly, in line with the steep decline in global demand for oil and gas. Compounding the problem was the Latin America is poised to grow again when the U.S. and sharp fall in equity markets—down 71.7%, and the largest Asian economies start to pick up, as it has the commodities drop globally. and manufacturing capability that will be needed during the• he U.K. experienced a 26.3% drop in its HNWI population T return to growth. Europe’s economic recovery is likely to lag, in 2008, to 362k. A mature economy, heavily reliant on as several major countries there continue to face difficulties. financial services, the U.K. was particularly hard-hit by In the Middle East, oil is expected to be a less dependable falling equity and real estate values. driver of wealth in the future, so growth there is likely to be slower than it has been in the past.Figure 4. HNWI Population by Country, 2008 HNWI Population by Country, 2008(in Thousand) Thousands) 4000 3,019* 3000 2008 Number 2,460 of 2007 HNWIs 2000 (in 1,517* 1,366thousand) 1000 833* 810 413* 364 491* 362 396* 346 281* 213 212*185 207* 164 169* 129 143 131 161*127 0 United Japan Germany China P. R. United France Canada Switzerland Italy Brazil Australia Spain States Kingdom Position 1 2 3 5 4 6 7 9 8 12 10 11 in 2007*2007 data has been revised*2007 data has been revised as a resultof updated data becoming availableSource: Capgemini Lorenz curve analysis, 2009Source: Capgemini Lorenz curve analysis, 2009
6 World Wealth Report 2009Our global forecasts assume continued difficulties for the Notably, HNWI wealth grew at a strong annualized rate ofglobal economy in 2009. We expect some initial signs of close to 9% in 2002-07—the recovery years following thegrowth in selected countries, which could pick up steam from bursting of the technology bubble. While the tech downturn2010, but protracted weakness in the global economic and/ and the most recent financial crisis are not identical formsor financial systems could force a downward revision in our of disruption, we nevertheless expect the recovery in HNWIforecast numbers. wealth to be similarly robust this time around, as the business cycle starts to trend back up.Figure 5. HNWI Financial Wealth Forecast, 2006 – 2013F (by Region)Figure 5. (by Region)(US$ Trillion)(US$ Trillion) 50 US$ 48.5 1.0 1.9 US$ 40.7 1.0 7.6 40 US$ 37.2 1.7 0.9 Annual Growth Rate 1.4 6.2 US$ 32.8 2008-2013F 0.8 5.1 1.4 13.5 Africa 4.1% Global 30HNWIs 9.5 5.8 Middle East 5.7%Wealth 8.4(in US$ Latin America 6.8%Trillion) 7.4 20 At 8.1% 11.4 Asia-Pacific 12.8% 10.1 10.7* Global CAGR Europe 6.5% 8.3 10 North America 7.0% 12.7 11.3 11.7 9.1 0 2006 2007 2008 2013*The 2007 numbers for Europe was restated from 10.6 to to 10.7 result of updated data becoming available*The 2007 number for Europe was revised from 10.6 10.7 asSource: Capgemini Lorenz curve analysis, 2009Source: Capgemini Lorenz curve analysis, 2009
World Wealth Report 2009 7 2008 in Review: Financial Market Crisis Culminates in Global Economic Downturn The run-up to the global economic crisis had, in hindsight, been 10 years in the making. Current-account • imbalances between creditor and debtor nations had widened, low yields had prompted a rampant search for returns, and the increased complexity and opacity of products had intensified systemic risk. • The U.S. financial crisis soon spilled quickly, broadly, and deeply into the real economy worldwide—damaging all the macroeconomic drivers of wealth (GDP, savings and consumption). National savings rates decreased, but so did consumer spending. The global economy is projected to post its worst performance since World War II. Most asset values, weak in 2008’s first half, plunged in the second half, turning the market-performance driver • of wealth from challenging to devastating. Global equity-market capitalization plunged nearly 50%, and global investors fled to fixed-income securities, settling for a return of their investment, not on their investment. • here is no clear consensus yet on when and how the global economy will return to growth. There are some T key issues to watch in the coming year, including the fiscal, financial and economic response of governments and financial authorities across the globe, with the U.S. and China as key players.THE ECONOMIC FALLOUT WAS TEN YEARS IN THE MAKINGAccounts are already legend of the financial crisis that began mature markets as another means of diversifying theirin 2007 and accelerated in 2008, before spreading to the global large asset bases.economy in 2008. In hindsight, several important trends b) Debtor nations spent wildly. As noted in the 2008 over the last 10 years marked the run-up to and unfolding of WWR, nations in the developed world, such as Spain,the economic crisis, and make events far more fathomable. Australia and the U.K.—and certainly the U.S.—hadThese include: demonstrated unsustainable spending patterns that resulted in large current account deficits. The U.S. con-1. urrent-account imbalances between creditor and C sumer has been the strongest single driver of global debtor nations widened over a 10-year period. demand for some time, accounting for $9.2 trillion, or a) reditor nations accumulated massive amounts C 18.6% of the world’s GDP in 2008.6 This is comparable to of reserves. After financial crises in the late-1990s, Asian the combined GDP ($10.8 trillion7) of Japan, China and and energy-rich nations started hedging against similar Germany—the next three largest economies in the world— shocks by increasing their savings, and building large bolstering the U.S. position as the leading debtor nation. current account surpluses. Much of the national savings 2. ow yields prompted a rampant search for returns. L were destined for central bank reserves, especially in China, Notably, real interest rates were driven down by strong where foreign currency reserves rose from $0.4 trillion demand from creditor nations and by government in 2003 to almost $2 trillion in 2008.4 These funds were intervention in the early 2000s. This encouraged investors invested primarily in low-risk assets, mainly U.S. Treasury to search for better yields—often in the form of excessive securities. For example, foreign investors (private and leverage and in novel product alternatives like complex official) owned nearly 60% of all U.S. Treasuries bonds structured products such as mortgage-backed securities as of June 20075, up from less than 20% in 1994. (MBS) and collateralized debt obligations (CDOs). Sovereign Wealth Funds, such as those of Singapore, Abu 3. he increased complexity and opacity of many T Dhabi, and China similarly invested in the U.S. and other products intensified systemic risk. Some of the4 Economist Intelligence Unit, Country Data for China, March 2009 6 Economist Intelligence Unit, Country Data for the US, March 20095 Financial Services Authority, The Turner Review: A Regulatory Response to the Global 7 Economist Intelligence Unit, Country Data for Japan, China and Germany, March 2009 Banking Crisis (London, U.K. March 2009)
8 World Wealth Report 2009 products designed in recent years to meet the strong World’s GDP Slumped in 2008, demand for yield were highly complex and opaque, as Economies Proved to be More certainly compared with standard exchange-traded products. Interdependent than Many Thought Moreover, it took the rescue of Bear Stearns, the collapse of The global economy is projected to post its worst performance Lehman, and the crisis at AIG to show the degree to which since World War II. There had been a general consensus the market for products like credit default swaps (CDS) that certain emerging economies, such as the BRIC nations relied on a complex and interrelated web of counterparties, (Brazil, Russia, India, China), had strengthened to the point which became deeply threatened by the changing environ- that they no longer relied on mature economies for growth. ment for the underlying products. This so-called “decoupling” would theoretically insulate those economies from mature-market downturns as well. However,THE U.S. FINANCIAL CRISIS SPILLED the decoupling theory was severely tested in 2008, as emergingQUICKLY, BROADLY, AND DEEPLY INTO markets followed in lock-step with the global contraction inTHE REAL ECONOMY WORLDWIDE GDP (although their declines were not as quick or as steep asThe financial crisis that started in 2007 and continued into those in mature markets—see Figure 6).2008 rapidly escalated and expanded into the general economy World GDP did manage to produce some growth in 2008 (2.0%),in mature markets, and culminated in a steep, global economic but it was down from 3.9% in 2007 and 4.0% in 2006. GDP indownturn, particularly in the last quarter of 2008. Export- G7 economies deteriorated progressively as the crisis unfolded,driven countries were hit hardest, particularly in Asia, as global and ended the year showing growth of just 0.6%. BRIC nationsdemand dried up. Many other countries and markets, especially continued to outpace many economies, led by China, despite thein the developing world, were struck by a sharp drop in foreign steep slowdown in the fourth quarter. Although the crisis spreadinvestment, as well as an overall drop in demand. All in all, worldwide, some regions posted relatively strong GDP growththe macroeconomic drivers of wealth (gross domestic product for 2008, especially Latin America (4.0%), and the Middle East(GDP), savings and consumption) were all hit hard. and North Africa (5.8%)8, but that only suggests these regions had yet to experience the full extent of the economic fallout.Figure 6. Real GDP Growth Rates, 2007-2009F Figure 6. Real GDP Growth Rates, 2007-2009F(%) (%) 2007 15 13.0 2008 2009F 10 9.0 9.1 8.1 7.8 6.7 5.6 6.0 6.0 5.7 4.8 5.0 5.1 5 3.0 3.3 2.7 2.5 2.4 2.0 2.1 1.1 1.3 1.2 1.4Percent 0.5 0.7 0.7Change 0 (%) -0.4 -0.7 -1.5 -2.2 -3.2 -3.0 -3.0 -5 -4.0 -4.4 -5.3 -6.4 -10 -8.8 United Canada Germany United France Russia Poland Japan Singapore China India Brazil Mexico States Kingdom -15 North Western Europe Eastern Asia-Pacific Latin America Europe AmericaSource: Economist Intelligence Unit – April 2009. Real GDP variation over previous year Source: Economist Intelligence Unit – April 2009. Real GDP variation over previous year.8 Economist Intelligence Unit, Regional Data, March 2009. Capgemini Analysis
World Wealth Report 2009 9National Savings Decreased in 2008, MOST ASSET VALUES, WEAKand So Did Personal Spending IN 2008’S FIRST HALF, PLUNGEDNational savings9 decreased worldwide in 2008, negatively IN THE SECOND HALFimpacting wealth, as there were fewer funds available for Market performance—another key driver of wealth—turned fromfuture investments. The ratio of combined national savings to challenging to devastating in 2008. Most key assets (equities, fixedGDP fell to 22.6% globally, from 23.1% in 2007, and to 16.4% income, real estate and alternative investments) experienced ain G7 countries, down from 17.2%.10 mediocre first-half at best. Then they were hit by a massive sell-It is customary for a decreased level of national savings to off, particularly in the fourth quarter, as investors fled to safecoincide with an increase in total consumption (private havens like cash, gold, and U.S. Treasuries. Many commodities andand public spending). Global government consumption did currencies—secondary drivers of wealth—also lost value in 2008.increase in 2008—by $0.3 trillion worldwide 11—partly driven Notable market events during the year included the following:by widespread government outlays on financial bailouts and • lobal equity-market capitalization plummeted nearly Geconomic stimulus packages. 50%, dropping below 1999 levels (see Figure 7). The globalHowever, 2008 saw a global slowdown in consumer spending, drop in equity-market capitalization was perhaps the mostas eroded consumer confidence and scarce credit prompted salient example of the severity of the crisis, as uncertaintywidespread thrift. The most salient example of this trend and fear pervaded investor sentiment in every region. In thewas in the U.S., where consumer spending grew just 0.2% in first half of the year, most equity markets lost value, though2008, after a gain of 2.8% in 2007—while the fourth-quarter there were some notable exceptions. In Latin America, forpersonal savings rate jumped to the highest rate since the example, the MSCI index rose 8.0%14, due mainly to thethird quarter of 2001 (3.2% of disposable income12). In Europe, commodities boom. However, during the second half, andpersonal spending grew 1.0% in 2008, down from 2.2% in especially after mid-September, equity markets sank across the2007. 13 The sudden end to rampant spending had a huge world—down 42.9% in the Americas, 53.5% in Asia Pacific,impact on the world’s GDP—especially given the U.S. and 51.0% in EMEA (Europe, Middle East, and Africa)—for aconsumer’s central role in fueling global demand. global loss of market capitalization of more than $30 trillion. Notably, some of the countries with the largest gains in 2007Figure 7. Market Capitalization by Region, USD TrillionFigure 7. Market Capitalization by Region, 1990 - 2008(1990 - 2008) CAGR (90-99) CAGR (99-02) CAGR (02-07) CAGR (07-08) 16.4% -13.2% 22.7% -48.6% 80 Americas: 20.3% Americas: -12.9% Americas: 15.3% Americas: -42.9% 63.4 EMEA: 19.7% EMEA: -14.1% EMEA: 24.4% EMEA: -51.0% 60 APAC: 7.7% APAC: -12.9% APAC: 34.9% APAC: -53.5% $USTrillion 40 35.0 32.6 25.4 22.8 Asia Pacific 20 Europe / Africa / Middle East 8.9 Americas 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source:Source: World Federation of Exchanges, April 2009. Federation of Exchanges, April 20099 National Savings = GDP - (Private Consumption + Government Consumption) 13 European Commission. European Commission Interim Forecast, Jan 200910 Economist Intelligence Unit, Regional Data, March 2009. Capgemini Analysis 14 MSCI Barra, Equity Indexes for select regions, (http://www.mscibarra.com/products/11 Ibid. indices/index.jsp)12 U.S. Bureau of Economic Analysis, National Income and Product Accounts Tables: Comparison of Personal Saving in the NIPAs with Personal Saving in the FFAs, March 2009
10 World Wealth Report 2009 posted the worst losses in 2008. China’s market cap was weighted (i.e., more diversified), we see that when the tech down 60.3% after a 291% increase the year before, and India bubble burst, the more diversified portfolio lost 37% of was down 64.1% after rising 118.4% in 2007.15 its value, while the less diversified portfolio lost 48%. By• quity-market volatility dwarfed levels seen in E contrast, the two indexes performed similarly in the late- recent crises. The rapid meltdown in equities occurred amid 2008 sell-off, and the more diversified index actually lost record levels of volatility. The CBOE Volatility Index, which more value (41% vs. 38%16). many wryly dub “the Fear Index”, surged in mid-September • lobal investors fled to fixed-income securities, G 2008 to the same levels seen during the stock market crash looking for a return of their investment, not on their of October 1987. The daily volatility of the Dow Jones investment. U.S. Treasuries outperformed every other fixed- Global Index (see Figure 8) did the same, and displayed income security in 2008, increasing 13.9% on a total-return levels comparable to those seen in the Great Depression basis, as demand surged in a flight to quality (see Figure 9). of the 1930s. Those volatility levels dwarfed anything The flight-to-safety was so intense that yields of short-term seen in the last 10 years, including the aftermath of the U.S. Treasuries actually dipped below zero in mid-December, Asian financial crisis, the collapse of Long-Term Capital when investors were primarily concerned with preserving Management, the bursting of the Tech Bubble, and the their capital. Total returns on investment-grade corporate September 11th terrorist attacks in the U.S. bonds were down nearly 7%17, while corporate junk bonds• aith in equity-market diversification proved to be F fell 23.5% in the US and 28.2% in Europe, their worst year in misplaced. Traditional attempts at equity diversification record, according to the ML US and Euro High Yield indexes. offered no respite, even to savvy investors, as the second- • Many commodities saw a boom-to-bust cycle. half 2008 sell-off afflicted most regions, types of company, Commodities rallied in the first half of 2008, when crude oil and industries. Data confirm that a more diversified equity prices neared $150 per barrel, and gold reached $1,000 per portfolio, which would have helped investors in previous troy-ounce. But, particularly after the collapse of Lehman crises, would not have protected them in the last quarter of Brothers, commodity prices sank, as investors started to 2008. In comparing two versions of the MSCI World Index, liquidate positions in a shift to safer assets. The Dow Jones- one weighted by market capitalization and the other equally AIG Commodities Benchmark plunged 55%18 from its peak inFigure 8. Daily Volatility of DJ World Index 1996 - 2008)Figure 8. Daily Volatility of DJ World Index, (1996 - 2008 3.0 Q4 2008 2.5 2.0 Daily Tech Bubble Volatility of DJ 1.5 Russian Crisis World September 11, 2001Index (%) 1.0 0.5 0.0 11/1996 04/1999 08/2001 01/2004 06/2006 10/2008Source: Dow Jones World (W1) Index – Daily close values from January 1st, 1993 to December 31st, 2008. Capgemini analysis. analysis Source: Jones World (W1) Index – Daily close values from January 1st, 1993 to December 31st, 2008; Capgemini15 World Federation of Exchanges, 2007-2008 market capitalization statistics.(http://www. 17 Rappaport and Serena Ng, “Bonds on Leading Edge of Crisis; ‘Not a Single Place to Liz world-exchanges.org/statistics) Hide’”, Wall Street Journal , Jan. 2, 200916 MSCI Barra. Equity Indexes for select regions. (http://www.mscibarra.com/products/ 18 Dow Jones. Historical Dow Jones – AIG commodities benchmark. (www.djindexes.com) indices/index.jsp). Capgemini Analysis.
World Wealth Report 2009 11 early-July of 147.6 points to 65.8 points in early-December, REIT benchmark index declined steadily, to around 1,000 wiping out all the gains accumulated since 2002. Gold (base value) in July 2008, where it held until mid-September proved to be the exception, as it benefited from its attrac- 2008. Thereafter, however, a heavy sell-off pushed the index tiveness as a safe-haven holding, and prices posted a gain of down more than 50% in a matter of weeks. The index had 5.8%19 for the year. Moreover, although jewelry is still the bottomed at 474.5 points by the end of October 2008, and predominant use of gold, uses of gold as an alternative to closed the year at 621.8 points.25 cash soared in 2008: Bar hoarding jumped by 60%, official • ew hedge funds escaped the losses, even with F 20 coins by 44%, and Exchange Traded Funds rose 27%. alternative strategies. Hedge funds had the worst• eal Estate losses intensified toward year-end. Real R performance in their history in 2008, belying the theory estate was another case in which a clear but steady down- that hedge funds naturally outperform in rough markets. trend in the first half of the year was dwarfed by sharp losses The fact that too many funds were holding a very similar in the second. Housing prices fell in many nations in 2008, asset base proved lethal once the equities sell-off accelerated making it one of the worst real estate years on record.21 at the year’s end. According to the Credit Suisse/Tremont Declines were evident worldwide, including Ireland (-11.8%), Hedge Fund Index, leading hedge funds globally returned the UK (-21.3%), Hong Kong (-13.4%), South Africa (-7.8%) a loss of 16.7%. Moreover, hedge funds faced liquidity and Dubai (-11.0%), where residential unit sales were 45% constraints, with hard-to-trade investments accounting for lower in the fourth quarter than in the third.22 Luxury up to 20% of total portfolios of approximately $400 billion.26 residential real estate prices also fell 25% on average glob- Assets managed by global hedge funds tumbled 25% to ally.23 The U.S. housing market continued to deteriorate, $1.5 trillion from nearly $2 trillion at the start of 2008. with a 19.5% loss for the year.24 However, real estate prices Nevertheless, some skilled managers were able to generate did remain constant or increase slightly in some countries, alpha despite adverse market conditions. The most successful including Japan, China and Germany. strategies were Managed Futures, with an 18.3% cumulative REIT prices also ended the year sharply lower. After peaking return for the year, as well as Dedicated Short, which at 1,574.9 at the end of February 2007, the Dow Jones Global returned 14.9%.27Figure 9. US Treasury Index vs. US, Europe High Yield Index 2008 – Rebased Figure 9. US Treasury Index Vs. US, Europe High Yield Index 2008 – Rebased(1/2/2008=100) (1/2/2008=100) 120 US Treasury 100 Rebased Value (%) 80 US High Yield EU High Yield 60 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecSource: Merrill Lynch. US Treasury Master, US High Yield Master, and Europe High Yield Master daily values 2008 Source: Merrill Lynch. US Treasury Master, US High Yield Master, and Europe High Yield Master daily values 2008.19 Carolyn Cui, “Commodities: Great, Then Ugly”, Wall Street Journal , Jan. 2, 2009 25 Historical Dow Jones Wilshire REIT Index Values, www.djindexes.com20 World Gold Council and GFMS Ltd. Identifiable gold demand (tons), 2009 26 regory Zuckerman and Jenny Strasburg. “For Many Hedge Funds, No Escape”, Wall G21 Anton Troianovski, “Real-Estate Markets Still Plumb for Bottom”, Wall Street Journal, Jan 2, 2009 Street Journal , January 2, 200922 lobal Property Guide Time Series Database, 2009 (Ireland, Hong Kong, UK and South G 27 redit Suisse Tremont Hedge Index. One for the History Books: Hedge Fund Performance C Africa). Merrill Lynch GCC Quarterly Report, Feb 2009 for Dubai in 2008, Jan 26, 200923 Kay Coughlin, President CEO, Christie’s Great Estates. Interview by Capgemini, April 200924 lobal Property Guide Time Series Database, Case-Shiller House Price Index, composite G 10 cities, seasonally adjusted, March 2009
12 World Wealth Report 2009• ost currencies had a mixed year, but the U.S. dollar M global demand remains low, and global unemployment, ended higher. During the first half of 2008, currencies particularly in Asia, continues to rise. such as the euro and the Brazilian real appreciated against • Interdependence of the global economy still prevails. the U.S. dollar (10.4% and 7.1%, respectively), while others The road to recovery will require close cooperation among remained stable (British pound, -0.1%), and a few lost value countries, given the enduring interdependence among 28 (Canadian dollar, -3.2% ). However, this trend changed global economies. For example, creditor nations may be able drastically in the second half of the year, after commodities to sustain themselves on their surpluses in the short and prices sank, and the global economic crisis worsened mid-term, but they will eventually need the force of fueling tangibly. Two significant second-half devaluations against economies, including the important private-consumption the U.S. dollar were the Brazilian real (-46.2%) and the British component, to help resuscitate global and local demand in pound (-38.0%). In late-2008, the U.S. dollar and the their economies, and reduce global imbalances. Similarly, Japanese yen both surged, fueled in part by widespread while in the past the BRIC nations were viewed together as purchases from investors unwinding currency carry trades. decoupled engines of global GDP growth, Brazil and India In the process, the yen appreciated 14.9% against the will likely support global growth, rather than fuel it, in the dollar.29 The dollar also attracted buyers in the second half of current environment, and Russia is expected to require a 2008 when the U.S. started to look like a stronger economy longer period of repair before it can regain its pre-crisis than many of its trading partners. growth levels. • A recovery of the global banking system is critical. WATCHING THE ECONOMIC HORIZON One of the fundamental drivers for economic recovery isCurrent conditions suggest any recovery will be slow, as the credit availability—which is heavily dependent on banks’crisis continues to permeate world economies. There is no balance sheets. Although some key indicators of theclear consensus yet on when and how the global economy banking system, such as the TED33 spread, have improvedwill recover, but there are certainly some key factors required: considerably, they are still at worse levels than before the crisis. Furthermore, it is not clear how much time• he U.S. is crucial for global economic recovery. The T it will take banks to complete the shedding of toxic majority of economists agree the U.S. recession will end in the assets, but it will be difficult for them to extend third or fourth quarter of 2009.30 However, while there have significantly more credit to the private sector until been some initial signs of growth following government they do. And without credit availability, it is much more intervention, the outlook for longer-term growth will difficult for the private sector to resume taking the risks depend largely on private-sector activity. Moreover, U.S. necessary for a sustained global recovery, such as increasing private consumption is imperative for a sustained, long-term employment, business investments, and taking up loans. global recovery as the U.S. to date has fueled approximately • Global fiscal and economic policies, and politics, will one-fifth of world GDP—more than any other economy by shape the road to recovery. Financial authorities and far. Economists expect unemployment to increase through- regulators from around the world quickly harmonized their out the rest of the year and only begin to dissipate in 2010. calls for a global response to a global crisis. The Group-of-• China is an important engine for growth. China has Twenty (G-20) Finance Ministers and Central Bankers pledged shown some increased signs of growth, mainly due to its in April 2009 to act to restore confidence, growth, and jobs, domestic stimulus spending (a $585 billion package repair financial systems to restore lending, and strengthen announced in November 2008). China’s stock market rose financial regulation to rebuild trust.34 However, it remains 8.4% during the first few months of 2009, outperforming all to be seen how governments will respond to politically G7 economies.31 However, the private sector seems to have sensitive issues (e.g., government spending, taxation, had a more significant contribution than in the U.S., with a protectionism, regulation) that will arise in driving rise in car and housing sales suggesting increased confidence growth. A meaningful recovery of the global financial in the domestic Chinese economy.32 These positive signs are system is not expected before 2010, which underscores also important for the global economy, as China’s renewed the importance of governments, regulatory agencies and appetite for products, particularly raw materials, would help financial institutions getting fiscal, monetary and other economies. However, these signs should be treated macroeconomic policies right. with caution, since Chinese exports are still declining,28 Ozforex. Historical data for select currencies against the U.S. dollar. (www.ozforex.com) 33 ED Spread = Difference between yields on Treasury bills and those on dollar T29 Ibid denominated deposits of major commercial banks outside the U.S. If the spread widens, it30 Phil Izzo, “Economists See a Rebound in September”, Wall Street Journal , April 9, 2009 signals investor concerns on the financial system.31 MSCI equity indexes for select China and G7 countries from Jan. 1, 2009 to April 10, 2009 34 roup of Twenty Finance Ministers and Central Bank Governors, The Global Plan for G32 ndrew Batson, “China Turns a Corner as Spending Takes Hold”, Wall Street Journal , April A Recovery and Reform, G20.org, statement released April 2, 2009 11, 2009
World Wealth Report 2009 13 HNWIs Sought Refuge in Cash, Fixed Income and Domestic Investments in 2008 HNWIs reduced their exposure to equities across the globe in 2008, but allocated more to fixed-income • instruments. By year-end 2008, equities accounted for 25% of total global HNWI financial assets, down from 33% a year earlier, and fixed-income accounted for 29%, up from 27% a year earlier. • NWIs kept far more cash/deposits in 2008—of global HNWI financial assets, 21% was in cash-based H holdings at the end of 2008, up 7 percentage points from pre-crisis levels in 2006. • NWIs also had slightly more of their financial assets allocated to real estate holdings, which rose to 18% H of the total global HNWI portfolio from 14% in 2007. They also sought safety in home-region and domestic investments, which increased significantly in all regions in 2008—and by a global average of 6.8%, continuing a trend that began in 2006. • NWIs are expected to remain fairly conservative investors in the short term, with capital preservation being H a priority over the pursuit of high returns. Looking toward 2010, though, the profile of HNWI portfolios is likely to shift as economic conditions improve, instigating a tentative return to equities and alternative investments as HNWIs regain their appetite for risk.HNWIs Reduced Exposure to Equities As global stock markets sold off in 2008, HNWIs joined thosein 2008 amid Shift to Safety, Simplicity retreating from equity investments. Accordingly, the propor- tion of wealth allocated to equities by HNWIs globally droppedHNWIs increased the proportion of their assets held in safer, by 8 percentage points (to 25%).simpler, more tangible investments in 2008, and reduced theirrelative holdings of equities and alternative investments (see North American HNWIs also significantly reduced theirFigure 10). Breakdown of HNWI Financial Assets, 2006 to 2008, 2010F to equities—an asset class they have long favored—Figure 10. exposure(%)Figure 10. Breakdown of HNWI Financial Assets, 2006 - 2010F(%) 100 10% 9% 7% 7% 18% 15% 14% 24% 75 17% 20% Alternative Investmentsa 21% 14% Real Estateb(%) 50 Cash / Deposits 27% 30% 21% 29% Fixed Income Equities 25 31% 33% 28% 25% 0 2006 2007 2008 2010Fa ncludes: Structured products, hedge funds, derivatives, foreign currency, commodities, private equity, venture capital Ib Includes: Commercial Real Estate, REITs, Residential Real Estate (excluding primary residence), Undeveloped Property, Farmland and OtherSource: Capgemini/Merrill Lynch Financial Advisor Surveys 2007, 2008, 2009.
14 World Wealth Report 2009to 34%, from 43% in 2007, but that was still 9 percentage in the second half of 2008, happy to settle for a return of, notpoints above the global average allocation to equities. on, their capital.Elsewhere, HNWIs also scaled back on their equity holdings Latin American HNWIs allocated the highest proportionamid stock-market volatility and declines. The allotment was among regions to fixed income investments (40%), though21% in both Europe and the Middle East by the end of 2008, that was up just 1% from 2007. Their preference for fixeddown 10 percentage points from 2007 levels in each case. In income largely reflects their traditionally low risk appetite.Latin America, it was down 8 percentage points to 20%. Conversely, HNWIs in emerging/developing Asia (i.e., exclud- ing Japan) allocated a much smaller proportion (17%) of theirHNWIs, Wary of Markets and Risk, Kept overall portfolio to fixed income investments.More Cash in 2008As the global banking and financial crises worsened, and credit Real Estate, especially Residential,tightened, HNWIs became more risk-averse and wary of complex Regained some of its Appeal forproducts in 2008, with global net inflows into money market HNWIs in 2008funds exceeding $455 billion for the year.35 Ultimately, there was Real estate investments picked up again in 2008, rising toa significant increase in the amount of HNWI wealth in cash- 18% of total HNWI financial assets from 14% in 2007, whenbased holdings—an average of 21% of overall portfolios, up 7 its share had dropped by 10 percentage points from the yearpercentage points from pre-crisis levels in 2006. before. The return to real estate reflected the preference of HNWIs for tangible assets, as well as a trend toward bargain-The proportion of cash-based holdings was highest among HNWIs hunting, especially in commercial real estate and newly builtin Japan (30%), where the savings rate has been traditionally segments,36 but also in residential real estate, where prices sawhigh, and was nearly as high in the rest of Asia (26%, up 5 the worst decline on record. Inflation hedging may also havepercentage points from 2007). By contrast, HNWIs in North spurred some buying.37America—where the use of credit is a ubiquitous source of fundingand payments—held the lowest amount of cash/deposits as a Overall, residential real estate38 accounted for 45% of totalpercentage of their total portfolios (14%, up only 3 percentage HNWI real estate investments at the end of 2008. Luxurypoints). residential property values dropped in 2008 to levels last seen in 2003 and 2004, prompting some HNWIs to buy, particularlyCash-based investments held outside of the formal banking “once in a lifetime” properties.39system (e.g. held in a vault etc) totaled 19% of global HNWIcash and deposit-based investments. HNWIs across Asia The emerging regions of the Middle East and Asia-Pacific(excluding Japan) held the highest proportion of cash (excluding Japan) had the highest HNWI allocation to realoutside of an account—29%, largely reflecting the lack of estate investment (25% and 23%, respectively), and the greatestconfidence HNWIs had in the regions’ emerging-market proportion of residential real estate (54% and 58%, respectively).banking systems, which tend to be less transparent than those Both regions have experienced an exponential boom in realin more developed markets. North American HNWIs held estate investment over the last few years, but a steep drop inthe least amount of cash outside of an account, at 14% of cash end-user demand has combined with lack of available financingholdings. to fuel a rapid decline in prices, particularly in the fourth quarter of 2008.HNWIs, Seeking Safety, also Allocated Within the Middle East, the biggest change in the real estateMore Wealth to Fixed Income market has been the shift in buyer profile—from short-termHNWIs continued to allocate an increasing proportion of speculative investors back to professional investors, who focustheir investments to fixed-income investments in 2008, on cash-on-cash yield potential40 (i.e., focusing on the returnbringing the allotment to 29% of global HNWI portfolios at on invested capital, not the asset value itself). Real estate in thethe end of 2008, up 2 percentage points from 2007. Middle Eastern lynchpin of Dubai peaked in September, beforeIn fact, many HNWIs around the world were willing to eschew falling about 25% in value during the fourth quarter of 2008.41returns altogether in favor of safety. For example, HNWIs were HNWI holdings of commercial real estate accounted for 28%among the investors who bought zero-yield US Treasury bills of total HNWI real estate holdings, little changed from 29% in35 Reuters, “Money market funds big winners in 2008”, April 21, 2009, http://uk.reuters.com/ 39 Kay Coughlin, President CEO, Christie’s Great Estates. Interview by Capgemini, April 2009 article/fundsNews/idUKLNE50602X20090107 40 Colliers International, GCC Real Estate Overview Second Quarter 2009 [Online], April 21,36 Knight Frank/Citi Private Bank, The Wealth Report [Online], March 24, 2009, www. 2009, http://www.colliers-me.com/marketreports.aspx knightfrank.com/wealthreport/TheWealthReport2009.pdf 41 The Economist, “Dubai: A new world”, April 25, 2009, http://www.economist.com/finance/37 Kay Coughlin, President CEO, Christie’s Great Estates. Interview by Capgemini, April 2009 displaystory.cfm?story_id=1352789138 Not including primary residence
World Wealth Report 2009 152007. Typically, there is little correlation between commercial HNWIs in Europe and Latin America saw the largest drop inand residential real estate performance, as the key drivers of hedge fund allocations, with both regions seeing their allotmentsstrength in each market differ. However, the financial crisis drop by 16% from 2007 totals, to 18% and 32%, respectively.has impacted drivers of demand in both markets—including Commodities, meanwhile, accounted for a slightly larger shareeconomic growth, rates of unemployment, consumer spend- of the aggregate HNWI portfolio at the end of 2008—13% vs.ing and personal income, mortgage availability, consumer 10% in 2007—as flight-to-safety purchases of gold (which sawconfidence, and demographics. its eighth straight year of price increases) offset the generalLatin American HNWIs had the highest allocation in the world decline in commodities prices and HNWI investment. HNWIsto commercial real estate (31%), following the huge boom in in North America had the highest allocation to commoditycommercial real estate across the region since 2006. investments (16%), as instability in the banking system fueled the flight to safety.Farmland and undeveloped property, meanwhile, comprised15% of aggregate global HNWI real estate portfolios in 2008, Foreign currency investment comprised only 14% of overallbut that share was much higher (31%) in Latin America, where HNWI alternative investment allocations, but that proportiona significant amount of wealth has traditionally been derived was much higher among HNWIs in Japan (27%) and the restfrom agricultural businesses. of Asia (25%), as HNWIs sought to hedge the currency exposure of their asset holdings.Notably, Ultra-HNWIs held more of their real estate holdingsin commercial real estate than HNWIs did in 2008 (33% of Allocation to structured products jumped to 21% from 15% inthe total vs. 28%), while holding less in residential real estate 2008, as HNWIs pursued the type of structured vehicles with(39% vs. 45%). This is largely because Ultra-HNWIs have more provisions that protect capital (not complex, opaque structures),assets at their disposal, and tend to have broader and more and sought to capture superior returns to conventional fixed-diversified portfolios than HNWIs, allowing them to more income investments.comfortably allocate a greater proportion of their wealth toless-liquid assets. HNWIs Sought Refuge in Investments Close to HomeHNWIs continued to reduce their holdings of real estate Amid turbulence in the world economy, HNWIs retreated toinvestment trusts (REITs) in 2008. REIT investments are familiar territory in 2008, continuing a trend toward home-generally more liquid than direct property ownership, so region, and domestic investment that began in 2006. ThisHNWIs were quick to sell as soon as real-estate sentiment trend has been marked by a reduction in North Americanstarted to turn negative. Only 10% of HNWI real estate assets as a percentage of overall HNWI holdings.holdings were in REITs by the end of 2008, down from 17%in 2007, and 22% in 2006. REITs continued their steady decline North American HNWIs increased their own domestic holdings,in performance from 2007 into the first half of 2008, before though, to 81%, up 8 percentage points from pre-crisis levelsplummeting more than 50% in the second half of 2008. REIT in 2006 (see Figure 11).investment fell the most in North America—to 14% of the re- Most notably, the economies of Asia-Pacific and Latin-Americagion’s overall HNWI real-estate investments. That was down 11 sharply increased home-region investment from 2006 to 2008percentage points from 2007, but that year had seen a relatively (by 18 percentage points and 25 pts, respectively).large allocation to REITs in historical terms. Latin America has experienced an especially steep increase inHNWIs Reduced their Holdings home-region investment, rising from 20% of global investmentsof Alternative Investments in 2006, before the crisis, to 45% in 2008. This in part reflectsHNWIs also continued to reduce their holdings of alternative the significant investment opportunities (e.g., equities) withininvestments as a whole in 2008 (from 9% of the aggregate the region over those years. In addition, government-drivenportfolio to 7%). Hedge fund investments accounted for 24% fiscal incentives in Latin America, along with relatively highof alternative investments by the end of 2008, down from 31% interest rates, have encouraged HNWIs to repatriate offshorea year earlier, as the hedge fund industry as a whole posted its investments.worst-ever performance and HNWIs shifted to more traditionalinvestments vehicles.
16 World Wealth Report 2009 Breakdown of Predicted HNWI Geographic Allocation by Region, 2006 - 2008Figure 12. Breakdown of Predicted HNWI Geographic Allocation by Region, 2006 - 2010FFigure 11. Breakdown of HNWI Geographic Asset Allocation, 2006 - 2010F(%)(%) Asia-Pacific Europe 4% 1% 1% 1% 2% 1% 1% 2%100 1% 1% 100 2% 2% 1% 2% 6% 4% 2% 4% 6% 3% 4% 6% 5% 10% 14% 11% 13% 75 75 50% 53% 68% 63% 50 50 52% 56% 65% 56% 14% 12% 25 11% 25 10% 27% 26% 26% 24% 22% 17% 20% 18% Africa 0 0 2006 2007 2008 2010F 2006 2007 2008 2010F Middle East Latin America Latin America North America Asia-Pacific 2% 1% 1% 1% 1% 1% 1%100 2% 100 1% 1% 2% 4% 4% 4% Europe 10% 8% 6% 3% 20% 10% 31% 11% 8% North America 41% 12% 10% 75 45% 75 12% 10% 19% 9% 50 7% 50 18% 15% 15% 73% 74% 76% 81% 25 47% 25 38% 33% 32% 0 0 2006 2007 2008 2010F 2006 2007 2008 2010FNote: Data for the Middle East not depicted, however trend remains sameSource: Capgemini/Merrill Lynch Financial Advisor Surveys 2007, 2008, 2009In Asia-Pacific home-region however trend remains sameNote: Data for the Middle East not depicted, investment accounted for 68% move some of their increased allocations of cash and short-termSource: March 2007, April 2008, March 2009 Capgemini/ Merrill Lynch FA surveyof overall HNWI investments, a level second only to North deposits back into longer-term, higher-yielding investments.America, where 81% of investment is domestic. Notably, when At a regional level, there is likely to be a substantial shift in home-home-region investment began to rise in 2006, it reflected an region HNWI investment activity. Overall, European HNWIs areopportunistic pursuit of high returns. In 2008, the motivation expected to scale back their regional investment to the 2007became safety, as Asian HNWIs fled the instability in more level of 56% of the total, while their investment in Asia ismature markets. expected to rise, most likely in developing Asian economies, where returns are expected to be higher (see Figure 11).HNWIs are Expected to Remain FairlyConservative Investors in the Short Term North American HNWIs are also expected to cut back onIn the short term, we expect HNWIs to remain moderately domestic investment, more than reversing the 2008 increase,conservative in their investment allocations, with capital and putting their overall domestic allocation at 74% of thepreservation being a priority over the pursuit of high returns. total in 2010 (down 2 percentage points even from 2007). However, increased North American investment by otherLooking toward 2010, the profile of HNWI portfolios is likely HNWIs should offset these outflows, especially if the U.S.to shift as economic conditions improve. In particular, there economy recovers, with North America remaining the topis likely to be a tentative return to equities and alternative destination for HNWI investments overall.investments as HNWIs regain their appetite for risk. We alsoexpect fixed-income holdings to increase slightly, as investors
World Wealth Report 2009 17Worlds HNWIs Scale Back on their Investments of Passion amid Economic Uncertainty and Rising CostsThe financial crisis and economic uncertainty of 2008 clearly Luxury Collectibles Remained thehad an impact on HNWI investments of passion and lifestyle Primary HNWI Passion InvestmenT, butspending, with luxury goods makers, auction houses, and Demand was Downhigh-end service providers reporting significantly reduced Luxury collectibles continued to account for the largestdemand worldwide.42 The cost of luxury items also rose: The portion of HNWIs’ passion investments in 2008—27% of theForbes Cost of Living Extremely Well Index (CLEWI), which total among HNWIs globally (see Figure 13), and 33% andtracks the cost of a basket of luxury goods, rose 12% from 29% respectively among HNWIs in Japan and North America.442007 to 2008, double the rate of inflation. The global-average allocation to luxury collectibles was upOutright global demand was weaker for luxury collectibles (e.g., marginally from the pre-crises level of 26% in 2006, but 2008automobiles, yachts, jets), luxury consumables (e.g., designer clearly saw an outright decline in demand for all of the majorhandbags, shoes, clothes), art, and jewelry, but there was also purchases in the collectibles bracket.a shift in luxury-purchasing habits, as many HNWIs looked to Private jet owners sold their planes in increasing numbers,secure their wealth in assets with long-term tangible value. as existing and potential HNWI customers of private jetActual HNWI spending patterns also varied considerably, as manufacturers continued to feel the impact of decliningalways, from region to region, between mature and emerging corporate profits and tight credit markets. Business jet ordersnations, and between wealth bands. For instance, demand for for Bombardier, the world’s leading business jet maker byluxury goods fell significantly in mature markets (which account value of deliveries, fell 42% in 2008 (from 452 to 262). Ordersfor more than 80%43 of world-wide luxury-goods sales), as the from previously high-volume business segments, in particularfinancial crisis deepened in the first half of 2008. At that time, fractional-ownership groups such as NetJets, slowed consider-demand was still strong from emerging markets, but as the year ably.45 As of the end of November 2008, the number of usedwore on, emerging-market HNWIs also pulled back, amid declines jets available for sale worldwide had risen by 62% from a yearin key sources of their wealth (oil, commodities, and stocks). earlier to reach an all-time high.46Figure 13. HNWI Allocations of Passion Investments, 2006 vs. 2008Figure 12. HNWI Allocations of Passion Investments, 2006 vs. 2008 7% Miscellaneousd 16% 7% Sports Investmentsc 6% 12% Other Collectiblesb 14% Jewelry, Gems Watches 22% Art Collections 18% Luxury Collectiblesa 25% 20% a “ Luxury Collectibles” represents luxury automobiles, boats, jets, etc. b “ Other Collectibles” represents coins, wine, antiques, etc. 26% 27% c “ Sports Investments” represents sports teams, sailing, race horses, etc. d “ Miscellaneous” represents club memberships, guns, musical instruments etc. Source: Capgemini/Merrill Lynch Financial Advisor Surveys 2007, 2009 2006 2008a “Luxury Collectibles” represents luxury automobiles, boats, jets, etc.b “Other Collectibles” represents coins, wine, antiques, etc.42c Luxury goods sales to drop as muchsports teams, two quarters of 2009 according to “Sports Investments” represents as 20% in first sailing, race horses, etc. “ 45 Kevin Done, “Business aircraft makers face severe test”, February 8, 2009, www.ft.com/d latest Bain Company luxury forecast ”, Bain Company press release, April 20, 2009 cms/s/0/15a51a1a-f613-11dd-a9ed-0000779fd2ac.html “Miscellaneous” represents club memberships, guns, musical instruments etc.43 Ibid 46 The Economist, “Corporate jets - Deeply Uncool”, January 8, 2009, http://www.economist.Source: Capgemini/Merrill Lynch Advisor Survey, 200944 Capgemini/Merrill Lynch Financial Financial Advisor Survey, March 2007, March 2009 com/displaystory.cfm?story_id=12906373
18 World Wealth Report 2009Luxury car demand also sank in 2008, with sales down in was driven largely by a decline in consignments, as well asthe U.S. at all major luxury makers—Porsche (down 25.2%), some investors refraining on purchases. The profile of the artMaybach (32.6%), Lamborghini (21%), Mercedes (11.5%), and buyer also changed, with demand shifting to more traditionalBMW (9.7%). Emerging markets provided some solace, with types of art, such as Impressionists or earlier forms of art.53 TheBentley sales up 53% in China and 18% in the Middle East in decline in the art market prompted cutbacks by auction houses2008, although Bentley’s global sales figures were down 24% from at Sotheby’s and Christie’s, which have been resizing theirrecord high levels of 2007.47 Luxury car purchases, it seems, are organizations and abandoning capital guarantees to sellers.54moving like many markets for the wealthy from the hyper-priced As in previous years, more European (30%) and Latin Americanand exotic to the more reasonably priced and familiar. (27%) HNWIs invested in Fine Art than did their Asian (23%),The yacht market offered another indicator that HNWIs were North American (21%), and Middle Eastern (17%) counter-scaling back on passion investments. Attendance at yacht shows parts.55 Still, the number of Middle Eastern buyers at Christie’swas down in 2008, prices were slashed, and the pool of unsold auctions globally has risen 400% since 2004, so Mideast buyersyachts grew. In the super-yacht market, there were reportedly now rival Russian buyers in terms of sales.56 Still, whilediscounts of up to a third being offered on yachts valued investors from emerging markets have increasingly helped fuelupward of $30 million, and sales of high-end pleasure boats the rise in Art sales, prices have come down globally, allowingplunged after a decade of unprecedented growth. From 1997 serious collectors and connoisseurs to buy at more ‘reasonableto 2007, Beneteau’s annual sales grew from $235 million to prices’. 48more than $1.4 billion—only to sink 50% in 2008. Alsonotable was the drop in demand from buyers that have been HNWIs Allocated More to Jewelry, Gems,active in recent years—in particular HNWIs from the Middle and Watches than Before the CrisisEast and Russia, where wealth was hit by sharp declines in the Jewelry, gems and watches attracted the third largest share ofprice of oil and commodities. passion investment overall (22%), and the top allocation in Asia and the Middle East. HNWIs certainly devoted propor-Fine Art Attracted HNWI Buyers tionately more to this category in 2008 than the 18% allottedSeeking Tangible Value; Discrete in 2006, before the crisis, suggesting HNWIs were more likelyPrivate Sales Jump to perceive jewelry, gems, and watches as “safer”, tangibleFine Art remained the primary passion investment for Ultra- investments that might retain long term value.57 Ultra-HNWIsHNWIs in 2008 (27% of their total passion investments), and devoted a relatively lower percentage (20%) to this category.was the second-largest (25%) for HNWIs. For HNWIs, the Nevertheless, the overall growth in global jewelry sales slowedallocation to Fine Art actually rose from the pre-crisis allotment markedly in 2008—to 2.5% growth from 9% in 2007, asof 20% in 2006, as investors gravitated to assets with a more the European and American markets cooled.58 Despite theenduring value. However, the art market still had a tumultuous challenging global circumstances, the historic Wittelsbachyear—ranging from a speculative buying frenzy to a price blue diamond (35.56cts) fetched $24.3 million in a Londoncorrection of about 30%.49 auction in December 2008, the highest price for any diamond orGlobal Fine Art auction sales totaled $8.3 billion in 2008, jewel ever sold at auction.59 Watches were the only category indown $1 billion from 2007, with U.S. Fine Art sales generating which healthy sales growth was evident (9%), and that increase$2.9 billion, down $1 billion from 2007. Sales in London was largely due to emerging-market demand.60 Sotheby’s Genevagenerated $2.96 billion in 2008, up a bit ($271million) from the auction house recorded record sales of about $15 million onyear before. 50 Notably, though, private sales nearly doubled, as watches, including a Patek Philippe that sold for $1.55 million.61some HNWI sellers sought discretion, and a quicker sale turn- Sales and interest in the Middle East and Asia have continued to 51around. Declining sales in the popular Contemporary Art stay strong in this category, despite the crises.category—in which sales generated 34% less than in 200752—47 Hannah Elliot, Luxury Cars Aren’t Selling Either, January 14, 2009, www.forbes. 55 apgemini/Merrill Lynch Financial Advisor Survey, 2009 C com/2009/01/14/detroit-luxury-automakers-biz-manufacturing-cx_he_0114luxcars.html 56 tefania Bianchi, “Christie’s Jewels Sale Sees Dubai Wealthy Shrug Off Econ Woe”, The S48 Carol Matlack, “Downturn Hits Europe’s Luxury Yacht Makers”, BusinessWeek, April 13, 2009 Wall Street Journal , April 28 200949 2008 Art Market Trends, April 2009, Artprice.com, (http://imgpublic.artprice.com/pdf/ 57 Capgemini/Merrill Lynch Financial Advisor Survey, 2009 trends2008_en.pdf) 58 “Luxury goods sales to drop as much as 20% in first two quarters of 2009 according to latest50 Ibid Bain Company luxury forecast”, Bain Company press release, April 20, 200951 Toby Usnik, Christie’s Corporate Communications, interview by Capgemini, April, 2009 59 Christie’s 2008 Global Art Sales Total $5.1 billion, Christie’s press release, February 12, 200952 2008 Art Market Trends, April 2009, www.artprice.com (http://imgpublic.artprice.com/ 60 “Luxury goods sales to drop as much as 20% in first two quarters of 2009 according to latest pdf/trends2008_en.pdf) Bain Company luxury forecast”, Bain Company press release, April 20, 200953 avier Espinoza, “In The Name Of Art”, Forbes, February 4, 2009 J 61 Jewelers Specialty Insurance Services, Jewelers Block Fine Arts Newsletter - High End54 Alexandra Peers “The Fine Art of Surviving The Crash in Auction Prices”, The Wall Street Jewelry Auction Mixed, December 2008, Volume 2, Issue 12 Journal , November 20, 2008
World Wealth Report 2009 19Allocations to Other Collectibles Recession Took Toll on PhilanthropyHeld Steady with Pre-Crisis Levels as 2008 Wore OnInvestments in Sports Investments (e.g., in teams, race horses) While not exactly an investment, philanthropy is neverthe-and Other Collectibles (e.g., wine, antiques, coins, memora- less a passion for many HNWIs and Ultra-HNWIs. There wasbilia) accounted for 7% and 12%, respectively, of all passion little change in the allocation of HNWI wealth to philanthropyinvestments in 2008. Those proportions were steady around in 2008 in the first half of the year70 —but charitable givingpre-crisis levels of 2006, but again, outright demand for these was severely impacted in the fourth quarter, as HNWIs gaveitems was clearly weaker in 2008. less, and focused on fewer causes.71 Moreover, the real impact of the financial crisis will probably become more evident inFor example, the Liv-ex 100 index, which tracks the price of 2009. Indeed, 60% of North American HNWIs said they would100 of the world’s best investment-grade wines, has fallen be giving less in 2009 due to the economic downturn, thoughsteadily since July of 2008. Some wine investors, hit by the 54% of HNWIs in Japan said they planned to give more.global financial fallout, resorted to selling their collections ofexpensive claret in a bid to raise cash.62 Even the Bordeauxwine market, which was once impervious to market fluctuations, Economic Woes are Likely to Suppressfroze after Lehman collapsed in September 2008. However, by Demand for Passion Investments into 2009 While HNWIs and Ultra-HNWIs will always indulge in theirthe year’s end, Bordeaux sales had revived to more normal passions, economic conditions are expected to suppress theirlevels, as “affordable luxuries” became favored.63 demand in 2009. Although the renowned Yves Saint-Laurent collection, which sold for $0.5 billion in February of 2009, wasLifestyle Spending Rose on Health/ dubbed the “sale of the century”, Christie’s is forecasting lowerWellness, but Dropped on Luxury Travel volumes of sales for the year.72 Some HNWIs and financialNotably, Health and Wellness was the only lifestyle spending institutions may be putting their art onto the market tocategory to see a significant increase in spending in 2008. raise funds and capital, but sellers are also hesitant about theOf surveyed HNWIs, 54% globally, and 64% of those in the market, and may want to wait for an overall market return beforeAsia-Pacific region, said they increased spending on this putting pieces up for auction. The last art market downturn,category64—which includes activities like high-end spa visits, which started in 1989, lasted for 4 years, but art experts sayfitness-equipment installations, and preventative medicine the market could prove to be more resilient this time around,procedures like full body scans. as recent buying was more broadly based, including buyers inEconomic uncertainty did, however, cut into HNWI spending Asia, Russia and the Middle East.73on luxury and experiential travel. Forty percent of HNWIs While auction sales will likely diminish in 2009, the quality andoverall, and 55% of HNWIs in North America, said they rarity of a piece—whether art, an antique, or jewelry—couldreduced such spending65 —dashing early hopes that luxury quickly drive activity, since many serious collectors and connois-travelers would not spurn travel during the financial turmoil.66 seurs still seem willing to lay out cash for an unique piece.Purchases of luxury consumables also fell, and 43% of all The global luxury goods industry, meanwhile, could well fall intosurveyed HNWIs, and 60% of those in North America, said recession, with an expected decline in global sales of 10% in 2009.74they spent less on luxury consumables in 2008.67 Luxury Nevertheless, name-brand luxury goods like Hermes and Cartiergoods maker Bulgari announced a 38% lower operating profit are expected to be resilient, as their exclusivity and brandin the third quarter of 2008, compared with the same period heritage continue to appeal to the wealthiest of globalin 2007, with sales for accessories falling by 16%.68 Richemont, consumers.75 Nevertheless, ‘affordable (and aspirational) luxurythe world’s second-largest luxury goods firm, reported that its goods,’ more widely accessible to HNWIs and the ‘mass-affluent’76sales fell 7% in the last three months of 2008.69 may suffer more of an impact amid perceptions that such purchases are a needless extravagance in tough times.62 Kelvin Tan, “Wine Art investments down, but not out”, November 21, 2008, www. 71 M. Rosen, “In Uncertain Times, Donors Hold Back”, The New York Times, February 26, 2009 Jan asia-inc.com/investing/332/332.html 72 Toby Usnik, Christie’s Corporate Communications, interview by Capgemini, April, 200963 Mehmet Yorukoglu, House of Burgundy, Inc., New York, interview by Capgemini, February 2009 73 The Economist , “A special report on the rich - A thing of beauty”, April 2, 2009, http://www.64 Capgemini/Merrill Lynch Financial Advisor Survey, 2009 economist.com/specialreports/displaystory.cfm?story_id=1335659465 Ibid 74 Luxury goods sales to drop as much as 20% in first two quarters of 2009 according to latest “66 PricewaterhouseCoopers LLP, Travel Tourism: A rough ride for luxury travel?, December 2008 Bain Company luxury forecast”, Bain Company press release, April 20, 200967 Capgemini/Merrill Lynch Financial Advisor Survey, 2009 75 “Worldwide luxury goods market growth projected to slow substantially by end of year and68 Ibid head into recession in 2009”, Bain Company press release, October 29, 200869 Tacy LTD - Richemont Jewelry House Sales down 12% in Q4 2008, DIB, January 21, 2009, 76 Individuals with US$100,000 to US$1,000,000 in investable assets https://www.diamondintelligence.com/magazine/magazine.aspx?id=753770 Robert Frank, “The Wealth Report: Giving by the Rich to Remain Strong in 2008”, The Wall Street Journal , August 20, 2008
20 World Wealth Report 2009 Spotlight: Optimizing Client-Advisor-Firm Dynamics is Key as Wealth Management Firms Tackle Crisis Fallout • ore than a quarter of HNWI clients surveyed withdrew assets from their wealth management firm or left that M firm altogether in 2008, primarily due to a loss of trust and confidence. Wealth management profitability was negatively impacted due to lower Assets under Management (market losses • and attrition) and an increase in low-margin asset allocation. Strategic levers can improve client retention and attrition by addressing clients’ heightened demand for • transparency and simplicity: statement and reporting quality, online access and capabilities, risk management and due diligence capabilities, desired product options and fee structures. While firms need to be client-focused, attention must also be given to the tools and support mechanisms • Financial Advisors need, particularly strong firm communications and client reporting.Wealth Management Firms Face market prices decline and clients withdraw assets—threatening the sustained and robust growth in assets under managementa New Industry Reality as Crisis (AuM) that has long powered the industry.Tests Client Confidence andLong-Standing Business Models In this environment, wealth management firms need to pay particularly close attention to client satisfaction, but ourThe global economic and market downturn has clearly research77 shows that firms and Advisors may not fullyshaken the trust and confidence that HNWIs placed in understand what is motivating their clients to leave or stay.markets, regulators, financial institutions, and the very Moreover, firms may be misjudging how satisfied their ownprinciples of portfolio management. Very few HNWIs or Ultra- Advisors are with certain critical service and support areas.HNWIs have gone unscathed amid the broad and deep declinein asset values, and many have shifted wealth to safer, more This Spotlight, in presenting some of our research findings,conventional and liquid investments. Some HNWIs have provides Advisors and wealth management firms withalso spread their assets across more institutions as a means insights on how to optimize their efforts to guide clientsto mitigate risk. and Advisors through the crisis and its fallout, and how to identify opportunities for improving client relationshipsAdvisors and wealth management firms are working to help and experience and effectively enable Advisors going forward.their HNWI clients through the crisis and its aftermath. Theyrecognize events have taken their toll, and have sought to AuM Showed Critical Decline in 2008increase communication, and offer more simplicity and as Asset Values Sank and Clientstransparency to the wealth management process to help Diversifiedrestore eroded trust. Of all HNWI clients surveyed, 27% said they withdrew assetsHowever, wealth management firms face discrete challenges or left their wealth management firm in 2008. In other words,of their own. Many are part of larger financial institutions given a global HNWI population of 8.6 million, each holdingthat have suffered substantial write-downs and losses tied to an average of $3.8 million78 in investable assets, trillions ofexcessive leverage. These units may face significant pressure dollars of HNWI financial wealth were potentially shiftingwhen it comes to retaining current clients and attracting new among firms in 2008.ones during these turbulent times. More broadly, the economics The ability to grow AuM is a key profit driver for wealthof the wealth management business model are being tested as management firms, but most saw assets decline in 2008.77 This research is based on quantitative and qualitative research. All survey samples are 78 Capgemini Lorenz curve analysis, 2009 statistically significant, including those of wealth management executives across nearly 50 firms, hundreds of HNWI clients, and over 1350 financial advisors.
World Wealth Report 2009 21Among 15 leading firms we profiled79, AuM fell an average As AuM Shifts Pressured the Costof 22%, compared with 17% AuM growth in 2007. Market Base, Firms Juggled Client Needsfactors had a significant impact, with the value of global HNWI and Expediencyfinancial assets falling 19.5% in 2008, but the desire of clients By definition, any loss of assets under management affectsto allocate assets across more providers was also an issue. the cost base for wealth management firms, and the impact ofNotably, while firms and Advisors are limited in what they can this trend was tangible in 2008. The cost-to-income ratio rosedo to mitigate widespread portfolio declines of the type seen in sharply among the firms we profiled—to 74% in 2008 fromthe crisis of 2008, they can be proactive in addressing the drivers 68% in 2007—even though many firms moved quickly to tryof provider diversification—which relate heavily to the broader and stem that cost-base growth.drivers of client retention and attrition that we will discuss later. Wealth management firms employed a wide range of short and long-term cost-cutting measures, from reducing head-AuM Mix also Shifted to Lower-Margin count to realigning/freezing compensation, along with budgetProducts cuts for line items like travel and marketing. As a result, theAn outright decline in AuM was accompanied by a shift in the growth in costs did slow markedly—to just 6% between 2007AuM mix, with clients allocating more holdings to low-margin and 2008 from 17% between 2006 and 2007.asset classes, such as cash, cash equivalents, and fixed-incomeproducts. (Fixed income generated an average margin of just Profit Issue is Undeniable as Wealth31.4 basis points in 2007 which may have slimmed even Management Firms Evaluate Strategyfurther during 2008.)80 Despite the upheaval in the industry, wealth managementFifty percent of HNWI assets were in these low-margin classes generally fared far better than other financial services in 2008.at the end of 2008, up from 44% a year before, and 35% at the Businesses like investment banking bore the brunt of revenueend of 2006 (see Figure 13). (We reported in the 2008 WWR declines, as weakening economic conditions underminedthat this asset shift was already under way in the second half of ubiquitous activities like trading and underwriting, and balance2007, when financial-market conditions started to deteriorate.) sheets were hit by write-downs in assets like mortgage holdings. In fact, among the firms we profiled, wealth managementFigure 13. HNWI Allocation of Investable Financial Assets, divisions significantly outperformed other business lines,2006 - 2008HNWI Allocation of Investable Financial Assets, 2006 - 2008 the gap between the profitability of firms andFigure 14. widening(US$ Trillion)(US$ Trillion) wealth management divisions—a gap that had already begun Other Assets to appear in 2007 (In 2006, pre-tax profit margins were equal to 30% for both wealth management divisions and Low-Margin Assets (e.g., Cash and Fixed Income) the entire bank, widening in 2007 before arriving at 24.5% 50 in 2008 for wealth management firms vs. -9.2% for all US$ 40.7 business lines combined of profiled global firms). Moreover, 40 US$ 37.2 several leading executives said wealth management played a US$ 32.8 critical role in the success or sustainability of diversified 30 22.8 banking companies during the challenges of 2008. SomeGlobalHNWI institutions even say they are reorganizing around three orWealth 24.2 16.3 four core divisions—in which wealth management will be 20 featured prominently. Despite the relative strength of wealth management firms, 10 17.9 16.5 13.0 (44.0%) (50.3%) profits remain an obvious concern, as firms deal with decreased (35.0%) margins and are forced to cut costs—often to mitigate losses 0 incurred in other bank divisions. The conundrum for many 2006 2007 2008 firms is how to make pragmatic business decisions (including cost cuts) that are appropriate to the tough operating environ-Source: Capgemini Analysis, 2009Source: Capgemini Analysis, 2009 ment, but still maintain and further client-service efforts. analyzed the leading wealth management firms by AuM using primary and secondary79 We 80 Scorpio Partnership, Private Banking KPI Benchmark 2008 (June 2008). research sources.
22 World Wealth Report 2009 Figure 3. Client Retention Strategic Lever Analysis, 2008Figure 14. Strategic Levers of Client Retention in 2008 (in %) 40 Online access and support Strategic Retention capabilities Levers Statement and reporting quality Gap Between 20 Risk management and Fee structure due diligence capabilitiesAdvisors and Clients Product availability/ Portfolio performance/(Percentage investment opportunity financial results Points) Geographic reach/expertise Service quality 0 Advisor-Client Investment advice Areas of Agreement Advisors Overestimates Firm reputation -20 Advisor relationship 0 25 50 75 100 Importance Level (% of Clients indicating ‘Very important’)Source: Capgemini Analysis, 2009 Source: Capgemini Analysis, 2009Our research findings identify and explain what drove clients These levers offer significant potential for improvement,to leave or stay with their Advisor or firm in 2008. As such, because they contribute tangibly to retention in a way manythe results offer wealth management executives perspective Advisors apparently do not fully understand. This suggestson how to prioritize their efforts to improve client service/ex- firms and Advisors have yet to address them fully. (Byperience and enable Advisors going forward—while balancing contrast, firms are likely to have dealt extensively with driversthose efforts against the challenging economics of the day. of retention that Advisors already understand well.) These high-potential levers for improving client retentionClient Retention and Attrition (see Figure 14) are as follows:are Complex Dynamics • Online access and capabilities, which were deemed very Service Quality was by far the Top important by 66% of clients, but only 32% of Advisors—aDriver of Client Retention in 2008 34-percentage-point gap.Importantly, Advisors generally understand the top drivers of • tatement and reporting quality (63% vs. 39%, a 24-pt gap). Sclient retention. For example, 88% of surveyed HNWI clients • isk management and due diligence capabilities (73% vs. 54%, Rsaid service quality was a “very important” reason for a 19-pt gap—(see Sidebar: Firms Can Act to Rebuild Shaken In-staying with their wealth management firm in 2008, and vestor Confidence through More Holistic Risk Management).87% of Advisors anticipated that would be the case. Advisors • ee structures (48% vs. 30%, an 18-pt gap). Falso understand the similarly high priority clients place onportfolio performance and investment advice. The retention analysis also revealed some areas that Advisors over-value, particularly their own relationship with the clientBeyond these outright priorities, however, our analysis shows (92% said the relationship was very important in driving afour other drivers that are highly influential in prompting clients client’s decision to stay, while only 73% of clients concurred),to stay with a firm/Advisor, yet are vastly underestimated by and their firm’s reputation (76% vs. 59%). This suggestsAdvisors.81 We use the term “levers” to describe these influen- Advisors have yet to adjust to the new reality in which trusttial but under-tapped drivers. and confidence in Advisors, firms and the financial system have been eroded (as we discuss next). our analysis, a factor had to be cited as ‘very important’ by a statistically significant81 In percentage of responding clients to qualify as an influential driver of retention in and of itself, before we evaluated the discrepancy between Advisor and client perceptions about the role of that driver.
World Wealth Report 2009 23HNWI Attrition was Fueled by Widespread clients, 62% were from the 41+ age bracket) than youngerLack of Trust/Confidence in 2008 Advisors (38%). This suggests that clients value experience inIn 2008, a loss of client trust and confidence took its toll on an Advisor, particularly when being guided through a crisis.the entire wealth management industry. Of surveyed HNWI • Of those Advisors that kept clients in 2008, 69% clients, 46% said they lost trust in their primary Advisor and an operated in a team-based model, while only 31%equal percentage in their wealth management firm, but their were from an individual-advisory model. Executives inmisgivings were more extensive even than that. For example, several regions told us the industry is starting to embrace78% said they lost trust in the financial system’s regulatory the team-based model as the preferred approach for servingbodies, which were supposed to be help guard against the type of HNWIs going forward, and this finding confirms the validitystaggering market and corporate losses that occurred in 2008. of that shift.It is not surprising then that so many HNWIs were motivated Seeing the implications of just these few findings indicatesto withdraw assets from their primary wealth management that dealing with client/AuM retention is likely to be farfirm, or to leave that firm altogether. As noted earlier, more more complex than it might appear. For one thing, althoughthan a quarter of surveyed HNWIs said they moved assets huge amounts of wealth did shift between providers in 2008,in 2008, suggesting trillions of dollars in HNWI assets were our research shows provider diversification was not in andin motion—and available to firms that could show clients of itself a major driver of attrition—suggesting HNWIs werea strong value proposition. This stark reality demonstrates actually prompted to defect or move assets because they werethe challenge for wealth management firms as they position dissatisfied on other counts.themselves to try to retain, recapture, and compete for newAuM in the months and years ahead. While Trust is Paramount, Specific Levers have Significant Power toFurthermore, behind the aggregate trends in attrition, there Curtail Attritionwere some notable dynamics among segments of our surveyed In fact, our research confirms loss of trust and confidence waspopulations of clients and Advisors. These trends could require a actually the most powerful driver of attrition among HNWIsspecific and proactive response from wealth management firms. in 2008, and the importance of the trust issue to clients isFor example: widely understood by Advisors.• ounger and middle-aged HNWIs, were more likely Y Not surprisingly, though, clients most often said loss of trust to leave or withdraw assets in 2008. As new generations in their Advisor had or would prompt them to defect or move begin to make up a larger percentage of the HNWI population, assets, while Advisors said loss of trust/confidence in the firm firms will need to take a closer look at the needs and expecta- was the number one driver of client attrition. This is consistent tions of these younger, more vocal HNWIs. This group may, with Advisors over-valuing their role in client retention. for instance, demand a more innovative use of technology To study attrition dynamics, we again used a gap analysis and media for communication than traditional clients. of the Advisor/Client Surveys to identify levers of improve-• lients whose wealth is derived from sources such C ment—once more focusing on those areas that were a priority as income and business ownership had a greater for clients in 2008 but were underestimated by Advisors.82 tendency to defect, while clients whose wealth is Our analysis identified three levers with significant potential inherited or built through investment performance were for stemming attrition. They are (see Figure 15): more likely to stay. This is a significant finding, because fully 52% of HNWI wealth was generated from business ownership • he availability of product/investment options, which was T in 2008, while income accounted for another 18%. This ranked as “very important” by 55% of clients but only 27% indicates that a significant portion of clients have a of Advisors—a 28-percentage-point gap. higher-than-average propensity to defect, and so their needs • tatement and reporting quality (49% vs. 26%, 23-pt gap). S require proactive management. • ransaction/management fees (48% vs. 21%, 27-pt gap). T• dvisors aged 41+ were better able to retain clients A during 2008 (of Advisors who were successful in retaining our analysis, a factor had to be cited as ‘very important’ by a statistically significant82 In percentage of responding clients to qualify as an influential driver of attrition in and of itself, before we evaluated the discrepancy between Advisor and client perceptions about the role of that driver.
24 World Wealth Report 2009Figure 17. Client Attrition Strategic Lever Analysis, 2008Figure 15. Strategic Levers of Client Attrition in 2008 (in %) Desired products/ investment 30 options Transaction/ not available Strategic management fees Attrition Levers Want to directly 20 manage more of his/her own assets Not satisfied with Not satisfied Advisor-Client statement and reporting with investment Areas of Agreement Gap quality performance BetweenAdvisor and 10 Personal Loss of trust and/or Client confidence in Advisor(Percentage Administrative Points) Loss of trust and/or Want to work with fewer firms confidence in firm 0 Want to work with more firms -10 0 25 50 75 100 Importance Level (% of Clients indicating ‘Very important’)Source: Capgemini Analysis, 2009Source: Capgemini Analysis, 2009Firms can Pull Attrition/Retention (client reporting, online access, product/investment options,Levers to Position for Long-term and due diligence for risk management).Success • ndependent Advisors may struggle (data indicates IFinding a way to satisfy customers, and keep them loyal, will HNWI clients will use 8% fewer Independent Advisorsbe critical to the long-term success of any wealth management in 2009 and beyond than they did in 2008, after thatfirm, given the evolving competitive landscape. usage rose an avg. 14.7% from 2006-08). Prior to the crisis, HNWIs may have deliberately chosen IndependentOur research shows that from 2006 to 2008, there was a large Advisors, believing them to offer an alternative perspectiveincrease in the number of providers across the board, and to mainstream firms. However, the financial crisis, andHNWI clients have identified which types of firms they plan related fraud scandals have served to undermine HNWIto use in 2009. There are three key outcomes of changing confidence in the ability of some Independent AdvisorsHNWI perceptions and preferences: to provide adequate due diligence and risk management• ocal and regional banks are poised for success L capabilities. (HNWI client data indicates usage of local/regional banks In this highly competitive environment, firms will need to be will rise 31% in 2009 and beyond from 2008). Amid growing proactive in mitigating AuM attrition, and improving client qualms about the stability of the financial markets, HNWIs retention rates. By combining insights garnered from both the have begun to see local and regional banks as safer alternatives, attrition and retention analyses, and deploying improvement a t least temporarily, since those institutions were less initiatives to under-developed capabilities accordingly, firms exposed to the more esoteric products that caused the should be in a better position to meet their clients’ expectations demise of larger counterparts. going forward and, ultimately, to retain and recapture AuM.• arge, global and national banks will be challenged L to regain the role of trusted Advisor, as client data indicates On an aggregate basis, for example, our results show fee HNWIs will use 6.6% more of these firm types in 2009 structures and client statements/reporting quality are common and beyond, which is a slower pace of increase than the denominators in client retention and attrition, so the average avg. 7.6% rise from 2006-2008. However, large global and firm may benefit most from pulling these levers first. national banks are possibly the best equipped to address In charting the way forward, however, firms should also pay certain strategic levers of client retention and attrition close attention to the satisfaction of Advisors, which our research shows is vital to preventing AuM outflows.
World Wealth Report 2009 25Enabling Advisors is Key to Firm Communications/DirectivesDelivering on Business Goals and Client Reporting are Key AdvisorOf surveyed Advisors who said they were dissatisfied with the Enablersservice and support enablement provided by their firms,83 fully Our findings confirm firms need to vigorously address Advisor90% lost clients in 2008, so it is clearly in the best interests of perceptions and needs through clear and frequent corporatefirms to make sure Advisors are satisfied with the core service communications, particularly in times of crisis.components of Advisor enablement. In fact, firms underestimated how dissatisfied Advisors wereSatisfaction also varied among Advisor types. For example: with all support areas (see Figure 16), but most notably client reporting and firm communications.• dvisors aged 41+ and those with more years of experience A tend to be more satisfied—as do those who have a longer • 3% of Advisors were dissatisfied with firm communications 2 tenure at their current firm. and directives during the crisis, yet practically none of the• hose Advisors that categorized their practice model as T CxO level executives interviewed thought that Advisors were ‘investment Advisors’ (IAs) were far more likely to be dissatisfied on that count. This suggests firms should take a dissatisfied (61% of the dissatisfied Advisors were IAs), while deeper look at Advisor expectations. Interestingly, interviewed those that worked as relationship managers (RMs) are quite executives indicate they are focusing heavily on improving likely to be satisfied (49% of satisfied Advisors were RMs). This client communication and intimacy, but communication finding is perhaps not surprising, though, given that IAs are with Advisors may be lagging—especially if firms believe their usually more hands-on with clients and portfolios than are Advisors have dealt well with this crisis. Our findings serve relationship managers, who delegate more of the portfolio as a reminder that firms should not underestimate the management to internal and external managers. need to address Advisor perceptions and needs vigorously, through clear and frequent corporate communications,Given these differences, it suggests firms should analyze the particularly in times of crisis.characteristics of their Advisor segments when deciding on • 22% of Advisors were dissatisfied with client reporting, the appropriate mix of enablement tools. This will help to but only 12% of executives said they would be. As we notedensure Advisors are properly aligned with the firm’s business earlier, Advisors themselves underestimated the valuemodel and strategic goals. Figure 19. Advisor Satisfaction with Service and Support Enablement in 2008Figure 16. Advisor Satisfaction with Service and Support Enablement in 2008 (% of Respondents Indicating FA Dissatisfied)(% of Respondents Indicating Advisor Dissatisfied) WM Executives 0.0% Firms communications and directives 23.2% during the crisis Financial Advisors 11.8% Client reporting 21.9% (online and statements) 6.7% Products and services required 15.8% to meet changing client needs 8.8% Advisor desktop and client 16.7% relationship management tools 8.8% Asset allocation models 15.3% and methodologies 11.8% Quality of product due diligence (risk) 16.6% and selection process Source: Capgemini Analysis, 2009Source: Capgemini Analysis, 200983 Advisors were classified as “dissatisfied” if they voiced some degree of dissatisfaction over major enablement tools provided by firms (i.e., tools/capabilities over which Advisors have least control, such as ‘Advisor desktop’ and ‘client relationship management’ tools).
26 World Wealth Report 2009 clients place on reporting, so Advisors and executives could Importantly, a significant gap can be found between the be compounding the tendency of their firms to under-value opinions of these experts and those who do not fully appreciate something valued highly by clients. client attrition drivers. For example, while the vast majority of well-informed Advisors say quality client statements andFirms can Focus Improvement Efforts reporting are very important to servicing clients, only 45%on Tools Valued by Knowledgeable of poorly informed Advisors say the same. There are similarAdvisors gaps in perceptions regarding other enablement counts (seeTo optimize efforts to improve Advisor satisfaction, firms can Figure 17), so wealth management firms will want to make surealso narrow their focus to the specific enablement tools valued they are especially listening to well-informed Advisors whenby Advisors who are already well-informed. evaluating their client-service strategies—especially since service quality is the number one driver of client retention.We characterize ‘well-informed’ Advisors as those whoseresponses are closely aligned with clients on questions about Conclusionattrition. These Advisors have a better understanding than Our research shows the numerous demands wealthmost of why HNWI clients leave/withdraw assets from their management firms now face in a bid to get the best out ofwealth management firm. According to these Advisors, the fluid firm-advisor-client dynamics. As a result, firms need tofollowing enablement tools are very important for servicing look anew at the assumptions behind their value proposition,clients: and see how that proposition must change with the times.• uality client statements and reporting (according to 79% Q In the Way Forward, we look at some of the practicalities of well-informed Advisors). involved for firms in assessing which of these differentiating• ustomer relationship management (73%). C levers has the most potential to drive retention and stem• nline access to information/services (69%). O attrition of clients and assets going forward.• lient website/portal (59%). CFigure 20. FA Sentiment on Tool Importance for Servicing Clients, 2008Figure 17. Advisor Sentiment toward Importance of Tools for Client Service(% of FA Respondents)(% of Advisor Respondents) 100 79.3% 80 72.6% 68.9% 34.1 59.4% 60 30.9 Advisors who Misunderstand Attrition Drivers pct pt 32.0 % of pct ptRespondents 45.2% pct pt Advisors who Understand Attrition Drivers 41.7% 32.0 Indicating 40 36.9% pct pt Importance 27.4% 20 0 Statement/ CRM Online access Client Website/ Reporting to Information Portal and ServicesSource: Capgemini Analysis, 2009Source: Capgemini Analysis, 2009
World Wealth Report 2009 27 Firms Can Act to Rebuild Shaken Investor Confidence Through more Holistic Risk ManagementThe dramatic downturn in 2008 severely shook the confidence U.S. Treasuries and certain structured products into aof HNWIs in the ability of traditional risk management “fixed-income” bucket. Even when such products werepractices to mitigate their downside exposure. Wealth comparable from a credit-ratings standpoint, some keymanagement firms acknowledge confidence is shaken, but inherent characteristics, such as liquidity, potential down-many still underestimate how the erosion of trust has and side and complexity, were different.could affect client relationships. • Weaknesses in due diligence and risk assessment practices also came to the fore, negatively impacting clients, when itTo assuage HNWI concerns and restore their confidence, appeared many firms had failed to recognize market fraud.firms may need to re-evaluate how best to align their clients’ For example, in the aftermath of various high-profile globalfinancial/risk profiles and personal goals with their true fraud cases, such as the Ponzi schemes perpetrated byrisk appetites. This will likely involve improving firms’ due Bernard Madoff ($65 billion) and Allen Stanford ($8 billion),diligence practices, and building more comprehensive risk some clients discovered they had been exposed to theseassessments. schemes via their Advisors without even realizing it. This issue may have demonstrated a lack of watchfulness and communi-2008 Prompted HNWIs to Question cation by some wealth management firms and Advisors.the Strength of Portfolio RiskManagement Practices These issues confirm the need for due diligence of products toRisk management frameworks are deployed at many levels be done by an independent assessment group to help ensurein financial institutions—from the enterprise-wide to the the risk profile of products is thoroughly evaluated.product levels—but we are largely talking here about the Our research84 confirmed the extraordinary circumstancesframeworks that apply to HNWIs individuals, their person- of the crisis negatively impacted perceptions of firms’ dueal risk profiles, and the portfolio-construction process. The diligence and risk management practices. Both Advisors andunprecedented events of 2008 rattled investors in general, HNWI clients ranked risk management and product duebut the following issues (separately and together) served in diligence capabilities as one of the top reasons clients choseparticular to undermine HNWIs’ trust and confidence in the to stay with or leave a wealth management firm in 2008.adequacy of wealth management firms’ due diligence and risk Nevertheless, many Advisors underestimated that very clientpractices in assessing and managing their portfolio risks: need. Of HNWI clients surveyed, 73% said risk management• he widespread investment losses incurred by firms around T and due diligence capabilities were an important factor in the globe eroded confidence in financial institutions—most their decision to stay with their firm in 2008, while only 54% of which were struggling to manage their own portfolios, of Advisors said it was a reason clients did and would stay. and swallow massive write-downs. Moreover, many wealth management executives overes-• any firms, it transpired, had failed to assess and fully M timated the quality of their firm’s due diligence and risk convey to clients the implications of product risks. HNWI management capabilities. For instance, when asked about client portfolios suffered as products and asset classes failed these processes, 50% of surveyed executives said they were to behave as anticipated—in outright performance, and satisfied with the current quality, compared to 40% of compared to the risks implied in their credit ratings. For Advisors. This may be because executives believe that their instance, some firms lumped together an extensive range firms execute their risk processes diligently, but that of diverse products into a single category, such as putting the analyses themselves are overly simplistic, resulting 84 Research compares responses to the same question in the Financial Advisor and Client Surveys—see methodology
28 World Wealth Report 2009in a systemic failure to deliver investor risk profiles trends to personal events like loss of income. This assessmentof the quality sought by clients and Advisors. For example, should go beyond traditional measures such as standardsome wealth management firms only employ basic deviation, to provide a detailed picture of extreme scenarios,profiling categories that peg an individual’s risk tolerance including potential cumulative losses over a period of time.somewhere on a scale from “Aggressive” through “Moderate” Moreover, scenario analysis can leverage elements fromto “Conservative”. A more comprehensive risk assessment behavioral finance to show clients the potential dollarwould help them understand client risk appetites on a far amount at stake whether a position’s value goes up ormore granular level. down. This is especially helpful because evidence suggests losses elicit a far greater negative reaction in investorsFirms clearly need to close any gaps between perception than the positive reaction produced by gains of the sameand reality as to risk and due diligence capabilities—both by magnitude.improving those processes, and by doing a better job of 3. eeper diversification refers to an exhaustive and Dcommunicating to clients the specific risk implications of granular analysis of a wide range of asset categories anddifferent products, and the risk-weighted role played by products, which avoids generalization and increases thesuch products in a given portfolio. The need to understand transparency in the client portfolio. Diversification shouldthe risks of each product, and communicate the implications occur not just along asset classes, but within asset classes.thoroughly to clients, could be especially challenging for For example, this type of approach can draw a distinctionAdvisors who use open product architectures with access to between the role of “fixed income” in a portfolioa wide variety of products from different sources. designed to generate future returns vs. one designed to preserve capital. Moreover, deeper diversification shouldComprehensive Risk Assessments are generally be better able than a random set of overlappingFundamental Going Forward investments, or even a portfolio allocation model, toIn the last two downturns, the portfolios of HNWIs who create a truly diversified portfolio. For instance, it couldhad gone through a comprehensive risk assessment fared be said that virtually any equity portfolio lost money inbetter than those of HNWIs who did not. Research shows, for 2008, regardless of its regional, company size or industryexample, that during the 2000-02 technology bubble down- focus, while deeper diversification helped investors whoturn the portfolio of a HNWI who completed a comprehensive also had solid allocations in gold and U.S. Treasuries torisk assessment would have lost 6.1%, whereas a more cushion the losses.conventional risk assessment for the same HNWI wouldhave resulted in a 15.1% loss.85 Similarly, HNWIs who took These elements can lay the foundation of a holistic riskadvantage of a comprehensive risk assessment in 2008 assessment, which also incorporates a thorough understandingsuffered smaller losses than those HNWIs who did not.86 of clients’ financial and personal goals. Accordingly, a client might initially identify him or herself as a “Moderate/A comprehensive risk management assessment can be Aggressive” investor, but might reconsider their positioncharacterized by three key elements: after learning the potential portfolio impact of a confluence1. ehavioral finance is a relatively new field that encom- B of events like loss of income along with unexpected market passes “soft” factors, such as the emotion around economic losses. As a result, the investor might put more emphasis on decisions—emotion that is known to skew perceptions containing personal risk, and less on pursuing returns (which about risk. Behavioral-finance approaches provide a more may also involve more risk). This shift would clearly change complete picture of the way clients make investment the Advisor/firm approach to portfolio design and execution decisions. This provides a richer level of detail that makes for that HNWI. it possible to go beyond the traditional “Conservative”, Additionally, looking at client risk by portfolio value alone “Moderate”, and “Aggressive” portfolio-model labels often is probably not sufficient. Understanding the client risk in used for individuals. totality, at their total wealth level is also important. Clients’2. cenario analysis can be used to assess and communicate S liquidity needs, income requirements, time horizons, risk to clients, in a thorough but simple way, the potential tolerance need to be integrated into the full risk assessment impact of extreme scenarios on a portfolio —from market along with performance expectations.85 Chhabra, Ashvin, “Beyond Markowitz – A comprehensive Wealth Allocation Framework for Individual Investors”, Merrill Lynch. 200586 Christopher Wolfe, Managing Director, Merrill Lynch. Interview by Capgemini, April 2009.
World Wealth Report 2009 29Using Holistic Risk Assessments can and a proper risk-appetite appraisal—in the context of theAddress Client Risk Profiles in a client’s total level of wealth.more Innovative Way • nvestment advisory process, i.e., creating an ongoing IUltimately, then, holistic risk assessment can directly drive relationship with the client to monitor portfoliothe portfolio-construction and investment advisory-process performance—not just of the portfolio itself, but against the(see Figure 18). client’s total wealth picture, so adjustments can be made for changing life events and needs, and evolving marketThe HNWI’s appetite for personal, market, and aspirational conditions.risk are weighed against their precise goals and needs—after Several wealth management firms are already leading thefull disclosure of the potential risks and dollar impact of e.g., industry in helping their HNWI clients to understand theira confluence of events or extreme scenarios. true risk tolerance through these kinds of deeper assessmentA thorough holistic risk assessment could help ensure the processes. These innovative processes help firms to understandsubsequent, inter-related phases of the portfolio-management how clients emotionally process and make decisions aboutand individual risk profiling process will be more effective. preserving, maintaining, and growing their investments.Those basic stages are: By participating regularly in holistic risk assessments,• road and deep asset allocation, i.e., finding the most B HNWIs are likely to feel a far greater level of confidence in the suitable combination of a wide range of asset classes and risk management and due diligence practices at their wealth products therein, given the holistic risk assessment. management firm. They will also be better informed, and• ortfolio construction, i.e., allocating investments to P more qualified to participate directly in creating their own specific products whose risks and function the client personalized investment strategy. For wealth management fully understands. The Advisor or investment-team role is firms, then, stronger and more comprehensive risk assessments essential in helping ensure the selection is done in a are a cornerstone of regaining HNWI client trust. strategic way, in line with deep diversification processes,Figure 18. Holistic Client Risk Assessment as aas a Core Element of Ongoing Client-Advisor Interaction Figure 21. Holistic Client Risk Assessment Core Element of Ongoing Client-Advisor Interaction HOLISTIC CLIENT RISK ASSESSMENT ONGOING CLIENT-ADVISOR INTERACTION Individual Goals and Needs Cash flow needs Other assets Broad / Deep Asset Allocation Financial assets Net worth Ability to weather Regional shortfalls preferences Holistic Portfolio Event risk Lifecycle stage Client Risk Construction Assessment Aligning risk exposure to goals and needs* Protect Maintain Improve Investment (Personal (Market (Aspirational Advisory risk) risk) risk) Process*Note: “Protect” goal refers to client desire to minimize losses in falling markets; “Maintain” goal is to minimize risk during unremarkablemarkets (e.g., usinggoal refers to client desire to minimize losses in falling markets; “Maintain” goal is to minimize risk during *Note: “Protect” a deeply diversified portfolio); “Improve” goal is to maximize returns in rising markets unremarkable markets (e.g., using a deeply diversified portfolio); “Improve” goal is to maximize returns in rising markets
30 World Wealth Report 2009Way Forward: For Wealth Management Firms, Success Now Rides on their Capacity toRestore Client Trust and Confidence, thereby Growing Share of HNWI AuM, and Managing it ProfitablyThe financial crisis has produced seismic shifts in the wealth likely to be parked in cash and cash-equivalents, so themanagement industry heightening the prospect that only onus will remain on firms to demonstrate a compellingsome will emerge from the disruption as winners. What and evolving value-proposition, as the market recovers andpresents a distinct opportunity to some firms—and a threat clients begin to lean toward measured and then greater risks.to others—is that HNWIs are more engaged than ever infinding the best management for their assets, their con- Four Key Principles Redefine Successception of what constitutes best has changed. As a result, In this new environment, firms therefore may need toopportunities exist for firms of all types and scale to redefine “success” around four key principles:compete for assets—yet at the same time a dominant position • etaining existing assets. It is critical to understand and Rbuilt on one set of principles may be less secure in the future. improve on the factors most likely to increase the retentionIn our research, we interviewed dozens of wealth manage- of clients and their assets, now that HNWI propensity toment executives, surveyed hundreds of HNWI clients and defect is so high. As explained earlier, the top drivers ofthousands of Advisors. The message was clear: HNWI trust retention are quality service, portfolio performance, andand confidence has been severely tested—by outright market investment advice, but Advisors already understand thoselosses, opacity in products and fees, and perceived failures in drivers quite well. The highest potential for improvementthe asset/product selection and management process. lies in “differentiating levers”. Those levers are drivers of retention that most firms still have ample room toCritically, HNWIs have also turned their misgivings into improve—statement and reporting quality, online accessaction. Many have moved or further diversified their assets and capabilities, risk management and due diligenceamong a greater number of firms in the hopes of mitigating capabilities, and fee structures.their risks and losses, or to demonstrate outright dissatisfac- • hifting S portfolio allocation models towardtion. In addition, many have reallocated their wealth to less mutually value-creating assets. HNWI risk appetitesrisky assets. Our research also shows that some have fled to have changed, at least for now, so firms should focus onlocal banks and wealth management firms in search of more client-allocation models on averting downside risk—whichtraditional practices, and simpler products and fee structures. will greatly contribute to rebuilding confidence and re-In the process, some firms have been net winners of AuM, establishing client-advisor trust. This approach may notothers have not. However, even the winners are likely to find generate the returns of the past—for either firm or client—themselves managing investment activities that will be costly but should help achieve the goal of building relationshipsfor them to support in the long term, in light of the extensive that can create sustained value over time.services they currently provide. Moreover, simply attracting • cquiring client assets. Capturing new client assets Aclients and assets in this environment is just the start of could hinge directly on presenting an attractive propositionthe challenge. For the short-term, newly attracted assets are relative to heightened client demands. In some cases,
World Wealth Report 2009 31 success in attracting clients may be as simple as offering a Our research does not advocate that firms attempt to excel on proposition that directly addresses issues specifically driving every lever—which will most likely result in undue complexity. dissatisfaction in an existing relationship. Rather, the research supports benchmarking current capabilities• ptimizing operations will require sustained focus and O and Advisor perceptions against global and regional realities measured actions to align the client and Advisor needs of to assess which of the levers should be the focus, and what the service model with the new revenue realities. With specific measures are most suitable. nearly half of all HNWI assets in lower-performing, lower-fee asset classes, there will be an impact on profitability—likely Fact-Based Benchmarking may a significant one. Thus the mandate is to carve out costs so Debunk Long-Held Beliefs as to invigorate the firm’s viability, while preserving brand In conducting a fact-based benchmarking of capabilities, integrity, and responding effectively to client and Advisor firms may well debunk some of the industry tenets and priorities. assumptions they have long used to prioritize theirTo make astute decisions toward achieving success, each firm investments. They may also recognize why focusing on theshould differentiate their short and long-term priorities. Firms client-service priorities they once had—such as geographicthat succeed in retaining and attracting clients and their assets presence, reputation and brand, and the Advisor relation-now—even if these assets remain in cash and equivalents—will ship—may have relatively little influence on retaining andbe in a stronger position to generate revenues in the long term. attracting clients in this new environment.Similarly, aggressive cost management will clearly generate Robust reporting tools and Online portals offer ashort-term benefits, but firms that pursue cost-cutting as a classic case in which HNWI priorities have shifted—eclipsingsurvival strategy will in fact cripple their strategic ability to what was acceptable before the crisis. Our research concludesdrive revenues in the long term. Advisors whose perceptions of value are well-aligned with those of their clients already recognize that online portals enhanceHow to Move Forward? Focus on the client-advisor relationships, and do not act as a disinterme-Client Mandate diating force. In fact, the right tools will be essential goingThe most tangible baseline capabilities HNWIs demand forward to provide a factual basis for client-advisor collabo-in a wealth-management relationship are service quality, ration, and meet the heightened demand for transparency.investment advice, and investment performance—all of which Moreover, innovative collaboration tools, combined withfeed directly into less the quantifiable but critical overarching online reporting capabilities, are likely to be a critical needqualities of trust and confidence. However, there are other among younger HNWIs, who the survey shows are more likely tokey capabilities on which HNWIs now place a high priority defect.after the events of 2008—capabilities that have been largelyunder-tapped by firms, so they offer significant potential as Client reporting capabilities are obviously in place at most firms,“differentiating levers” of client retention/attrition going but their inadequacy has caused concern and suspicion amongforward (see Figure 19). HNWIs in the post-crisis paradigm. One industry executive we interviewed shared a case in which a European Ultra-HNWIThese levers are largely focused on capabilities in which asked her primary banker in the fourth quarter of 2008 for amost firms have already invested but HNWI expectations detailed report on the level and performance of her holdings.remained unfulfilled. As a result, especially given recent When 10 days had passed without a reply, the client askedmarket forces, HNWIs are now equivocally demanding these another of her other Advisors—at a smaller firm—how longcapabilities from their “trusted advisors”, and primary wealth such a report would take. The reply was “within a day”, andmanagement firms. the client promptly transferred over $25 million from the largerThe implication for wealth management firms is that, in firm to the smaller one. This was not an isolated incident.light of this mandate, they should re-evaluate whether the Clearly, HNWIs have learned first-hand the merits of prompt,capabilities they provide really are a) simple and transparent, transparent information during the crisis—whether it is neededb) of demonstrable value to existing and potential HNWI to make investment decisions or simply to calm theirclients, and c) good enough to retain and attract clients in a concerns. Firms are courting attrition if they underestimatenewly competitive environment. how crucial this long withstanding priority has become.
32 World Wealth Report 2009Similarly, the issue of fee structures has come to the fore • Client Experience—initiatives that support and enhance among clients who may have grudgingly accepted ambiguity the client-advisor-firm relationship, especially differentiatorswhen their asset values were skyrocketing, but now feel more such as meaningful client segmentation, touch-pointthan justified—when viewing their shrunken portfolios—in alignment and collaboration, operational design, as well asdemanding a full accounting of how fees are calculated and personalized services. These are usually the most visible tolevied. Again, simplicity and transparency are key. clients. • ractice and Portfolio Management—alignment of the PIn perhaps the most alarming indication of the shift in client organization from a business and technology perspective,priorities, firms are also finding that long-standing high-value including a variety of advisor-practices models needed tocustomers (e.g., HNWIs or Ultra-HNWIs who have kept their optimize different client-advisor relationships.inherited wealth with the same firm for many generations, • isk Management and Due Diligence—simplified Ror even a single client who has remained loyal for many and transparent communication to clients about dueyears) are becoming more demanding across all levers. We are diligence, institutional and product-risk managementalready observing wealth management firms whose long- processes, and the risk-weighted role played by products inheld clients are now asking Advisors to submit proposals, so a given portfolio.they can directly compare the specifics of their offering—fee • nterprise E Information and Services—coherentstructures, reporting capabilities, and so on—with that of enterprise-wide vision and strategy for information, data andcompeting Advisors at other firms. business processes which shapes the technology mandate for driving operational effectiveness.Tactical Approach to CapabilitiesStill Requires Strategic The overarching goal is to identify and capture synergiesUnderpinnings from the investment in different levers to deliver a return—For firms, the first step to success is undertaking a frank assess- in terms of the firm’s ability to retain and grow AuM, andment of their ability to demonstrate the capabilities HNWIs become the client’s primary and trusted Advisor.demand. Ultimately, current events—the global market crisis, world-The tactical priorities should be to focus on whatever is the wide generational wealth transfer, the changing shape andappropriate mixture of investment in the differentiating size of the global HNWI population—have presented wealthlevers, given the firm’s business model, priorities and short- management firms with a defining moment from whichterm financial situation. Whatever the specifics, firms must to (re-)emerge as leaders. While it isn’t yet clear whichultimately hold themselves accountable for meeting client firms will thrive in the long term, it is clear that wealthdemands for a high degree of transparency, due diligence, and management firms will need to re-evaluate many of theirsimplicity, as well as stellar core capabilities. long-standing assumptions about trust and value, and respond proactively and rationally to the new realities facing theirHowever, to deliver successfully on differentiating levers, such clients, Advisors, and the industry.as client reporting, online portals, risk and due diligence, itwould be prudent for firms to refresh and recommit theirlong-term operational strategy, comprising:
World Wealth Report 2009 33 Figure ?. Wealth Management Client Servicing FrameworkFigure 19. Wealth Management Client Servicing Framework INDUSTRY BASELINE L H L H L H Service Quality Investment Performance Investment Advice DIFFERENTATING LEVERS L H Reporting and Statements C A L H L H Risk Fee Management Structures C C Pragmatic and Appropriate Mix of Levers L H L H Online Product/Investment Capabilities Options C C L H Firm Communications and Directives A Lever for Managing Client Retention and Global Client Priority Level C Attrition Global Advisor Priority Level Lever for Enabling Advisors through Service A and Support Global Firm Priority LevelNote: The industry baseline and differentiating lever results are based on 2008 data
34 World Wealth Report 2009Appendix A: MethodologyThe World Wealth Report covers 71 countries in the market-sizing using a time series of data going back over 100 years, so that the impactmodel, accounting for more than 98% of global gross national income of a sharp currency appreciation for a year or two has a negligibleand 99% of world stock market capitalization. effect. For example, our analysis shows that if exchange rates in 2008 had remained at the same level as in 2007, global HNWI wealth inWe estimate the size and growth of wealth in various regions using 2008 would have been only 0.2% lower than our reported figure ofthe Capgemini Lorenz curve methodology, which was originally US$32.8 trillion.developed during consulting engagements with Merrill Lynch inthe 1980s. It is updated on an annual basis to calculate the value The information contained herein was obtained from various sources; we doof HNWI financial wealth at a macro level. not guarantee its accuracy or completeness nor the accuracy or completeness of the analysis relating thereto. This research report is for general circulationThe model is built in two stages: first, the estimation of total wealth and is provided for general information only; any party relying on theby country, and second, the distribution of this wealth across the contents hereof does so at its own risk.adult population in that country. Total wealth levels by country areestimated using national account statistics from recognized sources,such as the International Monetary Fund and the World Bank, to We would like to thank the following people for helping to compile thisidentify the total amount of national savings in each year. These are report:summed over time to arrive at total accumulated country wealth. Ileana van der Linde and William Sullivan from Capgemini, for their overallAs this captures financial assets at book value, the final figures are leadership for this year’s report; Benjamin Beauvalot, Frederico do Valle,adjusted based on world stock indexes to reflect the market value Dhawal Jadhav, Bhushan Joshi, Vignesh Kumar, Jairo Rios, Nikhil Shinde,of the equity portion of HNWI wealth. In conjunction with the Cassandra Venn, and David Wilson, for researching, compiling and writingEconomist Intelligence Unit’s efforts to provide the most accurate the findings, as well as providing in-depth market analysis; Gregory Saxtondata, select historical figures have been updated since publication and members from the Capgemini Wealth Management Practice, for theirin previous reports. insights and industry knowledge and in particular from our global network:In 2005, we revised the methodology to move from reporting only Basak Aydin, Judit Benchabo Bengio, Antonio Benavides, Carmen Castellvi,annual regional findings to include country level information. Andres Guibert, Ville-Matti Koskinen, Wayne Li, Robin Segerfeldt, ChristineWealth distribution, which differs by country, is based on formulized Stapf, Jonas Vedung, Martina Weimart. Additionally, Karen Cohen and Lisarelationships between wealth and income. Data on income distribution Desmond, for their ongoing support globally.is provided by the World Bank, Global Insight, Economist Intelligence Selena Morris, Tricia Nestfield, along with Sara-Louise Boyes, ClaireUnit and by countries’ national statistics. We then use the resulting Pinborough and Stephen Fenichell from Merrill Lynch, who providedLorenz curves to distribute wealth across the adult population in each direction, access, industry perspective and research to ensure developmentcountry. To arrive at financial wealth as a proportion of total wealth, of topical issues being addressed in the Financial Services industry; Riccardowe use statistics from countries with available data to calculate their Barbieri, Sheryl King, Richard Orlando, Steve Samuels, and Christopherfinancial wealth figures and extrapolated these findings to the rest of Wolfe from Merrill Lynch, who provided expert advice on industry trends.the world. Each year, we continue to enhance our macroeconomicmodel with increased analysis of domestic economic factors that We would also like to thank the hundreds of Financial Advisors and regionalinfluence wealth creation. We work with colleagues around the globe experts from Capgemini, Merrill Lynch and other institutions who participatedfrom several firms to best account for the impact of domestic, fiscal in surveys and interviews to validate findings and add depth to the analysis.and monetary policies over time on HNWI wealth generation. We extend a special thanks to those firms that gave us insights into eventsThe financial asset wealth figures we publish includes the values of that are impacting the Wealth Industry on a global basis as well as thoseprivate equity holdings stated at book value as well as all forms of participating in this year’s Financial Advisor Survey, and facilitated the HNWIpublicly quoted equities, bonds, funds and cash deposits. It excludes Client Survey.collectibles, consumables, consumer durables and real estate used forprimary residences. Offshore investments are theoretically accounted Altae Banco Privado S.A., ANZ Private Bank; Banco Popular; Banco Urquijo;for, but only insofar as countries are able to make accurate estimates Banesto; Bank Hapolim; Bank of America; Bank Sarasin; Bankhaus Lampeof relative flows of property and investment in and out of their KG; Barclay’s Wealth; Berenberg Bank; BNP Paribas; Commonwealthjurisdictions. We accommodate for undeclared savings in the report. Private Bank; Coutts; Christie’s; Christie’s Great Estates; Credit Suisse Group; Danske Capital; Enam Securities; Deutsche Bank PWM; FirstGiven exchange rate fluctuations over the past years, especially Republic Bank; HSBC; Hyposwiss; ICICI; Ipsos MORI; Itaú Unibanco; JMwith respect to the U.S. dollar, we assess the impact of currency Financial Services; Jyske Bank; Kotak Mahindra Bank; La Caixa Bancafluctuations on our results. From our analysis, we conclude that our Privada; Marshall Ilsley Wealth Management; Matanzas Financialmethodology is robust and exchange rate fluctuations do not have Services LLC; Motilal Oswal Financial Services; National Australia Bank,a significant impact on the results. Op-Pohjola Group; Overseas-Chinese Banking Corp.; Pictet Cie; Popular Banca Privada; Rothschild Bank; Sal. Oppenheim; Schretlen Co.; SGThe translation to U.S. dollars is made using a yearly average exchange Hambros; Societe Generale Private Banking; Standard Life Wealth; TDBFGrate. The WWR model calculates cumulative wealth in U.S. dollar terms Global Wealth Management; UBS; United Overseas Bank; US Trust
World Wealth Report 2009 35Appendix B: Select Country breakdown Appendix B: Select Country Breakdown Growth (07-08) Growth (07-08) Growth (07-08) -23.4% -8.4% -24.1% 200 160 143 300 281* 131 169* 120 240 213 150 129 Number Number Number 180 of 100 of 80 of HNWIs HNWIs HNWIs 120 (000) (000) (000) 50 40 60 0 0 0 2007 2008 2007 2008 2007 2008 Australia Brazil Canada Growth (07-08) Growth (07-08) Growth (07-08) -11.8% -2.7% -31.6% 500 1,000 150 413* 833* 810 123 400 364 120 750 Number 300 Number Number 90 84 of of 500 of HNWIs 200 HNWIs HNWIs 60 (000) (000) (000) 250 30 100 0 0 0 2007 2008 2007 2008 2007 2008 China Germany India Growth (07-08) Growth (07-08) Growth (07-08) -28.5% -26.3% -18.5% 150 491* 136 500 3,500 3,019* 120 400 2,800 362 2,460 97 Number 90 Number 300 Number 2,100 of of of HNWIs 60 HNWIs 200 HNWIs 1,400 (000) (000) (000) 30 100 700 0 0 0 2007 2008 2007 2008 2007 2008 Russia United Kingdom United States *2007 data has been revised as a result of updated data becoming available Source: Capgemini values Curve Analysis, 2009*2007 numbers are restated Lorenz due to market sizing model upgradesSource: Capgemini Lorenz curve analysis, 2009
36 World Wealth Report 2009 Capgemini Financial Services As one of the world’s foremost providers of consulting, technology and outsourcing services, Capgemini enables its clients to transform and perform through technologies. Capgemini provides its clients with insights and capabilities that boost their freedom to achieve superior results through a unique way of working - the Collaborative Business Experience - and through a global delivery model called Rightshore®, which aims to offer the right resources in the right location at competitive cost. Present in more than 30 countries, Capgemini reported 2008 global revenues of EUR 8.7 billion and employs over 90,000 people worldwide. Capgemini’s wealth management practice can help firms define the size and potential of their target markets across the globe, understand market share, develop growth strategies, and enable them to adapt their practice models and client experience strategies to changing market conditions. Capgemini can also help firms differentiate their offerings by providing strategic solutions and re-aligning the organization from a business and technology perspective. For more information, please visit www.capgemini.com/financialservices Select Capgemini Offices Beijing +86 10 656 37 388 Milan +39 024 14931 Bratislava + 421 2 444 556 78 Mumbai +91 22 675 57000 Brussels +32 2 708 1111 New York +1 212 314 8000 Bucharest +40 21 209 8200 Oslo +47 2412 8000 Budapest +36 23 506 800 Paris +33 1 47 54 52 00 Chicago +1 312 395 5000 Prague +420 225 093 111 Copenhagen +45 70 11 22 00 Singapore +65 6224 6620 Cupertino +1 408 850 5500 Stockholm +46 853 68 5000 Dubai +971 4 433 56 95 Sydney +61 292 93 4000 Dublin +353 1 639 0100 Taipei +886 2 8780 0909 Frankfurt +49 69829 010 Tokyo +81 3 5467 6311 (NTT Data) Helsinki +358 9 452 651 Toronto +1 416 365 4400 Johannesburg +27 11 280 6000 Utrecht +31 306 89 0000 Krakow (BPO Center) +48 12 631 6300 Vienna +43 1 211630 Lisbon +351 21 412 2200 Warsaw +48 22 850 9200 London +44 20 7734 5700 Zagreb +385 1 2480 177 Madrid +34 91 657 7000 Zurich +41 44 560 2400
World Wealth Report 2009 37Merrill Lynch Global Wealth ManagementMerrill Lynch Global Wealth Management (GWM) is a leading provider of comprehensive wealth management and investmentservices for individuals and businesses globally. With approximately 16,000 financial advisors and more than $1.1 trillion inclient assets, it is among the largest businesses of its kind in the world. More than two-thirds of GWM assets are with clients whohave a net worth of $1 million or more. Within GWM, the Private Banking Investment Group provides tailored solutions toultra high net worth clients, offering both the intimacy of a boutique and the resources of a premier global financial servicescompany. These clients are served by more than 160 Private Wealth Advisor teams, along with experts in areas such as investmentmanagement, concentrated stock management and intergenerational wealth transfer strategies. Merrill Lynch Global WealthManagement is part of Bank of America Corporation.Select Merrill Lynch OfficesAmsterdam +31 20 592 5777 Miami +1 305 577 6900Atlanta +1 404 231 2400 Milan +39 02 655 941Bahrain +973 17 530 260 Montevideo +598 2518 2602Bangkok +662 685 3548 Mumbai +91 22 6632 8000Beirut +961 1 983 004 New York City +1 212 236 5500Beverly Hills +1 800 759 6066 Panama +507 263 9911Boston +1 800 937 0866 Paris +33 1 5365 5555Brussels +32 2 7619520 Pasadena +1 626 817 6888Buenos Aires +5411 4317 7500 San Francisco +1 415 955 3700Chicago +1 800 937 0466 Santiago +562 370 7000City of Industry +1 626 965 6691 São Paulo +5511 3175 4100Dubai +9714 425 8300 Seoul +82 2 3707 0400Dublin +353 1 243 8611 Shanghai +8621 6132 4888Geneva +41 22 703 1717 Singapore +65 6331 3888Hong Kong +852 2844 5678 Sydney +61 2 9225 6500Houston +1 713 658 1200 Taipei +886 2 8758 3600London +44 20 7628 1000 Tel Aviv +972 3 607 2000Los Angeles +1 213 627 7900 Tokyo +81 3 6225 8300Luxembourg +352 49 49 111 Washington, D.C. +1 202 659 7222Madrid +34 91 432 9900 Zurich +41 44 297 7800Melbourne +61 3 9659 2666